In the world of loans, luxury belongings may be a means to an end. More often than ever, banks and other companies that finance small businesses are accepting expensive cars, fancy watches, and even pricey artwork as loan collateral.
Why Use Luxury Assets as Collateral?
This form of creative financing for your small business may get you some pretty competitive loan rates, with some banks offering rates as low as two percent. Now that’s a steal! Moreover, lenders may be less concerned about your ability to repay when you have such luxury collateral, since the collateral is there for you to fall back on in case something goes wrong.
What’s the Catch?
There are, however, some strings attached when it comes to loans backed by luxury assets. Some lenders will actually hold the borrower’s assets under the lender’s name until the money is repaid in full when the loan term expires. What’s more, if your luxury assets are in the form of artwork, you may be restricted from lending the artwork to museums during the loan period.
In addition, sometimes lenders will count only a portion of the asset’s total monetary worth, so you may be forced to use assets that are actually worth much more than the final loan amount. The value that the lender provides generally varies depending on what the luxury asset is—for example, gold is worth more to banks than things like jewelry, which are worth more than even rare wine.
How Do Lenders Determine the Value?
For starters, many lending institutions will inspect the assets before approving them as collateral for a loan. Art appraisers, wine specialists, and other experts will generally be called upon to work with lenders and determine what the lenders will accept as its value.