What types of collateral are usually accepted?

A business loan in India may be secured against collateral or an asset that provides a security for the lender. The type of asset that you can offer as collateral will depend on several things including the amount of the loan, nature of the business, and the underlying risk assessment framework of the lender such as the profiling of the business, collateral coverage, and credit worthiness of the business.

Most lenders will accept a range of assets as acceptable collateral:

• Real estate in the form of commercial buildings, or residential property, whether owned by the business or its promoters, is a frequently accepted form of collateral.
• Fixed deposits or term deposits in your name can also be used as security. For manufacturing or trading businesses plant and machinery or even inventory and stock are sometimes offered as a pledge.
• In specific cases, some lenders may be willing to take accounts receivable or invoices in specific accounts (e.g. if your business has a perpetual flow of receivables) as collateral. Gold and/or other significant personal assets are in some cases also valued as collateral.

Not all loans require collateral. Many government-supported schemes and loans for micro, small and medium enterprise without security. If you have an offer to provide some collateral, it is sometimes possible to secure a larger loan amount or negotiate a better package for example, a lower interest rate, a better repayment term or both.

It is then critical that any asset you have pledged does not have any legal dispute and also a good ownership document trail. Lenders will closely check the collateral, its value and legal ownership before the loan is granted, and processes to check both tend to take time.