When requesting financing, such as a bank loan, there are a series of necessary requirements through which the approval of your credit request and the amount to be financed will be evaluated.

One of these requirements is collateral, which, in general terms, serves to guarantee that the debt will be settled in the event that your company does not have sufficient funds to be able to meet the payment of the debt.

For this reason, the collateral has become an obstacle to access financing, either due to the lack of this guarantee or because you have already occupied all the provisions for past financing.

In this post we explain what collateral is and what are the best financing options that do not require it.

What is collateral?

Collateral is a property or asset that serves as a guarantee against the concision of financing, as is the case with bank loans or credits.

These assets can range from real estate belonging to the owner or shareholders of the companies (houses, land, etc.), to machinery, vehicle fleet, bills receivable and other investments.

In most cases, when a natural or legal person requests a loan or financing, this collateral guarantee will be required to obtain it, since in this way the risks for the lender are reduced in case the debt cannot be settled.

In this way, the lender would take legal possession of the property or collateral asset in exchange for payment of the debt. Loans without collateral are known as “unsecured loans”.

Advantages and disadvantages of collateral

There are advantages and disadvantages to collateral, both for the lender and for the person seeking financing. Some of the advantages are:

• The credits are more accessible in case your credit history is not excellent.
• In general, interest rates decrease when there is collateral involved.
• Lines of credit or amounts financed tend to be higher than when there is no collateral.
• It is a good way to build credit history.
• The lender insures your money.

On the other hand, some disadvantages are:

• The application processes are usually longer, since the financial institution has to evaluate the value of the collateral.
• In the event of a default on the debt, you may lose your property or asset.

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