The Advantages of Collateral-Based Funding for Businesses of all Sizes

If you own a business, you might need funds to effectively guarantee the smooth operation and management of your business. Such funds can be raised by either opting for a secured loan or an unsecured loan. You may also need to offer collateral to approve the loan application. But what exactly is collateral-based funding for businesses?

What is Collateral-based funding?

Collateral-based funding refers to the process of securing a loan by offering assets or properties as collateral to the lender. This collateral acts as a form of protection for the lender, providing assurance that the loan will be repaid. However, collateral may be real estate, inventory, or other kinds of assets. It is depending on the purpose of the loan. By leveraging collateral, businesses can obtain secured loans with several advantages. Such as lower interest rates and more favorable terms.

For Example – Let us suppose that Mr Raman owns a business. He needs a fund for expanding the same. He also holds a property that is registered in his name. In such a case, Mr Raman can use this property as security against the loan. Thus, He obtains a secured loan against the property.

Types of collateral

The following are the types of collateral used to avail funding:

1. Real Estate

The borrower’s maximum use of real estate assets as collateral. Eg building, apartment, premises, flat, or bungalow. The land is also used commonly as collateral.

2. Equipment or Machinery

The borrowers can, however, obtain loans against the equipment as well as machinery by keeping them as collateral against loans.

3. Inventory financing

The manufacturing companies can have a crore of rupees stock which has to keep idle till the time it gets converted into cash. Also, the turnaround time for converting to cash is high. In such a case, the inventories can be kept as collateral for acquiring funds.

4. Invoices (unpaid)

The unpaid invoices. i.e., the outstanding invoices are commonly used as collateral. In the cases of Bill discounting and Factoring, such invoices get discounts. So the fund availed against them.

How does collateral-based funding work for businesses?

For availing of a collateral-based or secured loan, one must possess a tangible and lawful asset as collateral. So, Unregistered or unlawful assets are unlikely to get funding. Next is the valuation of the property, whether the property serves the purpose of the required amount. Since the volume of funds depends upon the value of the mortgage asset and one cannot get funds beyond that. The loan has been given based on the fair market value of the property.

The benefit of collateral-based funding

1. Funding is given against the assets. That will be used as collateral. The assets include fixed and tangible assets like land, building, machinery, etc.
2. Lower interest rates as compared to collateral-free loans.
3. More flexible tenures and repayment options than regular loans.
4. Faster approval process.

Collateral vs. Security

Collateral and security are distinct concepts. Collateral refers to any fixed or tangible asset, such as land, buildings, property, and machinery, which the borrower provides to the lender as security for the loan. The ownership of the mortgage asset remains with the lender until the borrower completes loan repayment.

Whereas, security refers specifically to financial assets (such as stock shares). That is collateral against loans. These include bonds, futures, swaps, options, and stocks.

A Conclusion

When seeking collateral-based funding for your business, Terkar Capital is your trusted partner. As a leading investment banking firm in India, we offer a wide range of financial products tailored to the unique needs of our clients. With a meticulous financial SWOT analysis, credit scores, business plans, industry trends, and sales, we ensure that our clients receive comprehensive funding solutions. Count on Terkar Capital to provide collateral-based funding that propels your business towards success.

FAQs on Working Capital Finance

FAQs on Working Capital Finance

The businesses face a cash crunch frequently, the major requirements for funding are from Micro, Small, and Medium Enterprises (MSMEs). The need for funds can be for paying dues, purchasing assets, running the business, expansion, etc. To overcome such issues, working capital can be the perfect solution. This type of finance helps in short-term operations and allows them to run their operations smoothly and efficiently.

1. What is the tenure in working capital finance?

Working capital finance is a short-term loan that is majorly used for managing the operational expenses of a business. Normally, the loans are offered for a period of 12 months. The criteria depend upon the lender as well as the requirement of the borrower.

2. What are the benefits of working capital finance?

The major benefit for borrowers is that it smooths the fluctuations in the cash flows of business operations and processes funding quickly. The working capital instruments have flexible repayment facilities, which gives an advantage to the borrower.

3. What do lenders look for in a potential working capital borrower?

The major potential required from the borrower in the case of secured funding is the collateral, whereas, in the case of unsecured funding, it depends upon the creditworthiness of banks and the track record of the borrower.

4. How much is the interest charged on the working capital instrument?

The interest depends upon the amount of the funds, the credibility of the borrower, and the repayment history of the borrower. Hence, the interest differs from case to case and lender to lender.

5. Which working capital instruments do we offer?

Terkar Capital arranges a variety of products in debt funding and assists the clients in choosing the best suitable one.

Below is the list of our instruments of working capital finance:

• Cash Credit Facility

• Bill Discounting

• Factoring

• Letter of Credit Discounting

• Overdraft Facility

• Bank Guarantee

6. How is the repayment criteria in working capital finance?

The repayment criteria depend upon the mutually agreed terms and conditions between the buyer and the lender, it can be through EMIs or as and when the borrower gets cash.

7. Is collateral compulsory for working capital funding?

The type of funding, whether secured or unsecured, totally depends upon the availability of collateral. Also, if available, the amount of the fund and the value of collateral should be matched. The only difference between both fundings is the rate of interest. Secured funding will fetch low ROI as compared to unsecured due to the presence of collateral. Terkar Capital will help you with a reasonable cost of borrowing from their clients.

8. Who provides a working capital finance facility?

The working capital facility is provided by banks, NBFCs, and financial institutions. The eligibility, repayment terms and documentation varies according to the respective lenders. We help to bridge the gap between eligible borrowers and capable lenders.

9. How does Terkar Capital help you in Working Capital Finance?

Terkar Capital is one of the top financial firms and provides quality services to its customers. We help you with arranging loans in Pune and across India. We understand the customers' needs and tend to provide the perfect financial solutions accordingly. Here the executives are highly trained and work enthusiastically for providing services with ease. Our timely and confidentiality in service makes us different and unique from others. Working capital is one of our services in which we have expertise. So whenever it is funding, Terkar Capital is ready to serve you at best!