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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
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5 comments

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.

 

Additional Information

Business Loan Checklist

Basic checklist to follow when applying for a business loan

Small Business Loans

Information on applying for a loan, how to find loans, and guidance to answer personal collateral and loan questions

Applying for a Loan

Process of writing a formal loan application and a detailed list of the 5 C's of Credit, including collateral

Message Edited by JamieD on 09-01-2009 12:39 PM
Tags: Community Blogs, Small Business Cents

Comments

johntakebadcredit | Window Shopper | 11/19/2012 - 4:26 am

You can get bad credit loans in less than 1 hour, throughout the 2012. Our
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monica88 | Window Shopper | 12/29/2011 - 2:35 am

In opening a business, there are a lot of things to consider. Of course, capital is the first in list.But it's difficult to make a loan especially if your business is just a small one. Big banks are becoming infamously difficult for small company owners or entrepreneurs to get financing through. Credit unions are building a powerful portfolio of business loans, but a new act in Congress aims to make lending more accessible. Resource for this article: New bill could help credit unions lend to small businesses

Jason Smith | Window Shopper | 12/28/2011 - 8:47 am

Thank you for these useful tips. I've also heard, that if the business already has purchase orders for a product or service it plans to deliver, the lender may accept that as collateral as well. Purchase orders have a potential for future income. You can pledge that future income from those purchase orders to repay the loan. Once you receive the loan funds to pay for the product and fulfill the order, you can make an arrangement to send the customer's payment, which commonly arrives a few months later depending on your invoice terms, directly to the lender. If a purchase order has already been filled and you're just waiting for payment from a customer, the lender may look at that situation even more favorably.
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KatherineF | Performer | 12/7/2010 - 6:29 am

Indeed, credit score is an important factor that shows the consumer's creditability and if you apply for any secured bank loan your credit report will be definitely checked and this fact will determine whether your the lender should approve your application or not. If your credit score is perfect and you have a stable source of income, then, your application will be definitely approved as these are the main criteria of your solvency. However, a number of payday lenders provide unsecured personal loans with no credit check and cover the taken risk by providing high interest rates. On one hand, it's a good opportunity for people with bad credit to get some extra cash necessary for some daily needs. On the other hand, high interest rates sometimes prevent borrowers from repaying the loan on time and, thus, they get additional fees for delayed payments. Well, of course, everything depends on the personal situation and everyone should make his own decision as for these short term loans. ---This post was edited to remove a commercial link. Read our discussion policies for more Community best practices.
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NJ1018 | Window Shopper | 11/11/2009 - 8:46 am

Great post. Thanks so much for the tip and guidelines. Often times, the first time we borrow money, our first lenders are our parents. When parents decline to buy a wanted item, children often besiege parents with promises to pay them back from their allowance. Although you may not realize it, that is the first time you have offered collateral in exchange for a loan. Cars can be used as collateral in many ways. The most common is to borrow the money for the car from a lender. This installment loan is divided into a set number of payments – most often 36, 48, 60 or even 72 months. The lender’s assurance that you will make the payments is your car is their collateral. Even if you make 71 of 72 payments, the lender can repossess your car, sell it, and collect the balance owed. A title loan can be obtained using a car that has not been pledged as collateral to another lender already. These loans typically carry very high interest rates, and are given to people with poor credit who need short term cash. Cars can also be pledged as collateral when borrowing money between friends and family. --------- $500 payday loans Message Edited by NicoleD on 11-12-2009 09:04 AM
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