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I'm Applying for a Loan. How Do I Know if I Have Enough Collateral ?
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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JamieD
- Hello! My name is Jamie. I'm a consultant for the U.S. Government and have been supporting the Business Gateway program for the last year. I look forward to hearing the concerns and advice you all have to offer our small business community!
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BobK
- My name is Bob Keating. I'm a consultant working on the Business Gateway program for the U.S. Government. I provide product strategy and develop new features and content for the site. I am very interested in hearing your ideas about how Business.gov can better serve the needs of small business owners.
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