5 Tips For Using Collateral To Secure A Small Business Loan

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5 Tips for Using Collateral to Secure a Small Business Loan

BY ERIC MARKOWITZ
Almost all banks require a small business to offer collateral for a loan. Here are a few tips on how to use your assets to secure financing for your company.
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Here's a fundamental truth of any organization: you need

cash to help grow your business. Whether you're a start-up, a sole proprietorship, or a limited liability corporation, getting a small business loan will be one of your top priorities if you're looking to expand your company's potential. But before you receive funds from a bank, a lender will scrutinize both you and your business to see if you're a viable borrower.
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Collateral assets are most commonly seen in the form of real property, inventory, cash savings or deposits, and equipment.
A bank will look at your company's history, business credit, revenues, balance sheet, and your equity contributions. If you pass a credit check and you operate a healthy business, most banks will also require an additional, and tangible, guarantee
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that their loan will be repaid: collateral. Collateral assets come in many forms. De!ined by the Small Business Administration, collateral is "an additional form of security which can be used to assure a lender that you have a second source of loan repayment." Most commonly, collateral is real property (i.e. an owneroccupied home), but it can also be represented by your business's inventory, cash savings or deposits, and equipment. In order to structure a loan that bene!its both you and your business, you'll need to make the right decision about what you o!fer up as collateral to the bank. It's also important to be realistic when considering the risks of defaulting on a loan, which could have harsh consequences for not only your business, but for your personal life, too. Below are a few tips on how you can use your assets as collateral, and how you can mitigate the risks associated of defaulting on a loan. Dig Deeper: How to Fill Out a Loan Application
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1. Keep Detailed Records of your Asset's Worth

Banks are notoriously conservative about valuing a borrower's assets for collateral. A!ter all, if the borrower does default, the lender must expend resources to take the asset, !ind a buyer, and sell it. Je!f Allen, the director of operations for Trendant, a small business consulting !irm based in Salt Lake City, says that one of the most common mistakes business owners make about collateral is they think it's worth a lot more than it actually is. "They're considering what they paid for it, and the banks only consider the fair market value of today," he says. If you're not sure of what your assets might be worth, it could be worthwhile to !ind an independent appraiser to give you an idea of how the bank will value your property. Besides for simply knowing your asset's worth, it's critical to keep detailed records of your assets on your balance sheet. When a bank is reviewing your business documents, they'll want to see that you're paying careful attention to all of the relevant factors. This is usually simpler than you think. "In keeping records, businesses tend to overcomplicate," says Allen. "They think there's some magical solution that the big boys use. The bottom line is that an Excel spreadsheet with a couple of line items is all you need."
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2. Know What You Can Use as Collateral

Essentially, there are two di!ferent types of collateral: assets that you own, and assets that you still have a loan against. If you still have a loan on the asset, (e.g. a mortgage for a house) the bank will be able to recoup the loan by re!inancing your loan from the institution you have the loan against, and claim the title. A viable asset to use as collateral will have a title of ownership, and banks will only lend if they can get a title back, says Allen. Homes and cars are the most common forms of collateral, but you can also use watercra!t, motorcycles, as well as pieces of equipment that have a title of ownership. Below are some relevant issues associated with each type of collateral that you should consider before approaching a bank for a loan.
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Real Property: Since the housing bubble burst, using real property as collateral !inancing
took a huge hit. Denise Beeson, a commercial loan o!!icer based in San Francisco, says that this has been a signi!icant roadblock for small businesses seeking small business loans. "It's devastating small business right now," she says. "In the past they've used the equity in their home, and they don't have any of that equity anymore." Additionally, banks will not consider vacant land, or "dirt" as its referred to in banking, as viable collateral.
Business Inventory and Accounts Receivable: Asset-based lending can be a great way to
get a fast in!lux of cash to your business. For example, if your !irm gets a big purchase order, you may not have the resources to meet the needs of the client without bringing on additional sta!f, equipment, or raw materials. In some cases, a bank will allow a company to use that purchase order as collateral. "It's a little trickier to get," explains Je!f Allen. "It might be more di!!icult because it's harder to authenticate. . .but a bank will usually lend against that."
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Cash Savings or Deposits: "Cash is always king," says Allen. Using personal savings will
almost de!initely be allowed as collateral since it's a low-risk loan for a bank. This also applies to CDs and other !inancial accounts. The advantage in using these accounts as collateral is that you're guaranteed a low interest rate because it's a secured loan. The disadvantage, clearly, is that if you default, the bank will take possession of your savings. Dig Deeper: How to Secure a Small Business Administration Loan
3. Understanding the Risks

Taking a loan using personal assets as collateral presents the risks of losing the assets in the event that you default on the loan. Therefore, it's important to discuss the risks of using certain assets as collateral with a !inancial advisor, as well as people that could be a!fected by the loss of that asset. "Some business owners are highly risk averse, and I wouldn't recommend putting some stu!f up for collateral," says Je!f Allen. "Because if you can't pay it, they're taking your car or home." Be realistic about your company's needs, and how the company will be using the funds. A !inancial advisor will help you assess the risks involved, as well as the odds of the loan being successful. "It comes down to being honest with yourself knowing your situation, and knowing what the funds will be used for," says Allen. "If you really need the money, you might to !ind alternatives, because you might lose what you've leveraged." O!ten, a limited liability company is formed to shield the business owner from these risks, but a default will inevitably still a!fect the owner, especially if he or she is the only shareholder. Dig Deeper: Banks Increase Small Business Lending
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4. Negotiate WhenAnd IfYou Can

If you're a quali!ied borrower with a demonstrable history of good business credit, you should be able to secure a loan with commitments you are comfortable with. Remember, a business can always reject a lender's o!fer and seek a loan from a di!ferent lending institution. Since banks tend to be exceptionally conservative when it comes to valuing your assets, it could be worthwhile to request an appraisal review, which is a report that comments on the accuracy of an appraisal. Similarly, a bank that does not require any collateral requirement will o!ten charge extremely high interest rates. Be wary of predatory lending practices that could end up being expensive and harmful to your business. Dig Deeper: How to Build and Maintain Good Business Credit
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5. Consider Peer-to-Peer Lending

If an asset-based loan isn't ideal for your business, Denise Beeson recommends alternative methods of securing cash. Peer-to-peer lending is becoming an e!fective way for small businesses to drum up cash in the short run. "Because it is extremely di!!icult to get a loan based on existing collateral, a lot of borrowers are going to peer-to-peer sites to see if they can get some money from that mechanism," she says
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While loans typically amount to less than $25,000, there's o!ten less red tape involved in obtaining a peer loan. Prosper.com, for example, allows borrowers to choose a loan amount, a purpose and then post a loan listing. Then, investors choose which loans they prefer to invest in based upon a series of criteria. Borrowers make !ixed monthly payments to their investors, who receive the funds directly in their Prosper account. Dig Deeper: Top 10 Reasons to Run Your Own Business
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a allb be errt tg ge eo orrg ge e

NOVEMBER 23, 2012 AT 12:44A M
Get your credit Report,Before making a loan or credit application,You have to check your credit score report and check for errors & omissions.After using Collateral your business remains in safer side .And the best part of this blog is Business owner should Understanding the risks.For more detail of small business loans visit http://www.biz2credit.com
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M Miic ch ha ae ell
FEBRUARY 4, 2011 AT 8:35PM
I know someone who has used On-Deck Capital (I believe it's ondeckcapital.com) for lending. Has a great analytical tool to figure out if how banks view your biz and if you can get lending.
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5 Tips For Using Collateral To Secure A Small Business Loan

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