Pledging assets, also called hypothecation, is something a company can do in order to collateralize a loan. Many lenders are unwilling or unable to extend loans to borrowers unless they have collateral the loan can be based on. Before pledging assets, you as a company owner should understand the implications involved and when it’s a good idea or a bad idea to do so.
Advantages: By pledging assets you are securing a loan you are seeking to obtain. Secured loans usually provide better interest rates than unsecured loans, since the lender has the security of knowing they will be paid back using the assets; better terms, so that you can defer payments until you have sufficiently invested capital from the loan; and secured loans can also have greater loan values, meaning that you as a business owner will be able to devote more capital throughout the needy areas of your business right away. In general, it is also far more likely for a loan to be granted if it has collateral attached.
Disadvantages: A company that does not pledge assets when obtaining a loan can have the surety that if it does end up defaulting on its loan, it won’t end up losing its assets in the process. Those companies that do default, however, will have their collateralized property collected in payment for the loan.
Before pledging assets for your company in order to secure a loan, you should first look closely at what will be involved. Assets can be tangible or intangible. By arranging these assets properly, you can often get a good deal on a loan while still retaining greater propriety.
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