I'm Applying for a Loan. How Do I Know if I Have Enough Collateral?
by JamieD, Former Moderator
- Created: July 21, 2009, 10:32 am
- Updated: June 17, 2011, 11:50 am
The most recently published blog from the Loans and Grants Advisor discussed acquiring and maintaining a business credit score. For most lenders, a great credit score will only get you so far. Whether entrepreneurs try to take advantage of using business credit, or rely solely on their personal credit scores, at one point or another they will be required to show some form of business loan collateral.
What is business loan collateral?
Loan collateral comes in the form of identifiable personal assets. These assets are used by lenders and investors as assurance that they will have some payment or recourse if a business was to default on their loan. Although not required for all loans, when it is, collateral is an extremely important aspect of your loan application and a heavy factor in securing financing.
What are examples of loan collateral?
Loan collateral can be comprised of both personal and business assets. Examples would be land, real estate, business equipment, investments, and stock options.
Who will assess my loan collateral?
Generally, both you and your lender will assess your loan collateral. Assessing loan collateral can be a difficult process and it is important to be aware that there are often differences between the lenders valuation of your collateral and your own. This is typical to securing loan financing because lenders need to have a backup plan for potential loan recipients that have trouble repaying their loan. At the end of the day, the lender has final discretion on collateral assessments because they make the final decision on loan approval.
How will my loan collateral be valued?
The best thing businesses can do is to prepare documents describing costs/values of each item and be prepared to back it up. Any up-to-date collateral information you have can be used to help lenders assess the value of your collateral. Appraisals, reports, records, and surveys can all be conducted to help lenders make appropriate judgments. As a rule, these documents should be collected within six months of submitting your loan application or they may be considered too dated and hold less clout than more current information.
Do I have any say in what will be used as collateral?
Yes! You can always turn down a lenders proposal for collateral requirements. It is best not to get committed to a situation where you are risking too much or the collateral requirements are overwhelming. Lenders that make extreme collateral requirements are simply trying to make a deal that removes all risk to themselves and puts the entire burden on you. Feel free to negotiate your collateral terms and try to find a compromise that both parties can agree upon.
Basic checklist to follow when applying for a business loan
Information on applying for a loan, how to find loans, and guidance to answer personal collateral and loan questions
Process of writing a formal loan application and a detailed list of the 5 C's of Credit, including collateral
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