What is Collateral?
When you or your business needs money quicker than you can ‘make’ it, the first option that comes to mind is getting a loan. While there are many types of loan and funding options out there, some require collateral.
What exactly is collateral?
When you think about it, if someone is going to give you money, they want to make sure that you are going to pay it back. But what happens if you can’t? Or don’t?
This is what lenders and banks use collateral for. It is something that you say the lender can ‘have’ if you can’t pay up. When it’s a mortgage, it might be the house itself. If it’s a car, it might be a co-signer. (Just in case YOU don’t pay, the co-signer has to!) And if the co-signer doesn't pay...then they can take the car! Sometimes it may be other accounts that you own like a 401k or savings account.
So how does a lender determine risk?
This could be a credit score, looking at previous accounts to see if you’ve missed payments on other loans, your income, and most recently, even your social media accounts! (Bad reviews are never a good sign).
The type of collateral a lender asks for depends on the type of funding you want…and of course, the repayment terms. For example, a merchant cash advance doesn’t require collateral because in return for giving you money up front, a company collects repayment from a business’ future sales. Many business owners think a
(MCA) is easy to get, but a lender is going to look at your business and its potential to bring in future sales. How much they give you is determined on how well they think your business can perform!
Make sure when you are taking out money, you read your contract and terms carefully and understand what it says. There are many great companies out there to help small businesses and not so many great ones. At GetBackd, we want our customers to make informed decisions.