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Collateral: Asset-Based Loans

November 12, 2020 • 2 min read

Many companies will offer asset-based capital loans. Meaning, companies or individuals that are taking out a loan, will offer assets or securities as collateral for the loan.

Here’s an example of how it works:

Fred, a young, and hardworking individual is looking to take out a personal loan. The financial institution approves his loan application, but because some personal loans are usually not secured, he will need to provide some form of collateral that holds monetary value.

In this case, Fred puts an insurance policy up as collateral until he can fully repay both interest and primary payments of the personal loan. Once he has repaid his personal loan, he is again in default owner of his insurance policy.

What can be used as collateral?

This may depend on the type of loan and the financial institution. Normally collateral can include:

Cars
Vehicles
Houses or Property
Jewelry
Insurance Policies
Future Salaries
Savings
Stocks or Bonds

Can a business offer collateral for a loan?

Small and midsize businesses can apply for business loans and offer collateral as secondary security. In this case, business owners can offer intangible assets such as investment funding, payment rights, accounts receivable, or perhaps copyrights as collateral.

Business loans work a lot differently than personal loans, and business owners will need to be aware that financial institutions will review financial statements, equity investments, credit rating, and the overall financial health of the business.

Do you need collateral with a positive credit score?

In many instances, individuals with a positive or good credit score won’t need to offer any form of collateral as secondary security. The same goes for business owners looking to apply for a business credit card.

Learn more about Collateral, its types, meaning, and examples.

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