5 Tips for Using Collateral to Secure a Small Business Loan

7/29/2019 5 Tips for Using Collateral to Secure a Small Business Loan

1/7

Login or signup ABOUT | NEWSLETTERS | EVENTS | ADVERTISE | SUBSCRIBE

STARTUP GROW LEAD INNOVATE PEOPLE MONEY VIDEO

5 Tips for Using Collateral to Secure a Small Business Loan | ... http://www.inc.com/guides/201101/5-tips-using-collateral-to-...

1 of 7 07/09/13 2:16 PM


2/7

317 SHARES | SHARE THIS ARTICLE

iStock

Collateral assets are mostcommonly seen in the form of real

property, inventory, cash savings or

deposits, and equipment.

MONEY

5 Tips for Using Collateral toSecure a Small Business LoanBY ERIC MARKOWITZ

Almost all banks require a small business to offer collateral for a loan. Here area few tips on how to use your assets to secure financing for your company.

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.

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

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 owner-

occupied 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

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 Excelspreadsheet with a couple of line items is all you need."

OWNER'S MANUAL

10 Habits of RemarkablyCharismatic People BY JEFF HADEN

SALES

10 Dumb Sales Tactics to AvoidBY GEOFFREY JAMES

OWNER'S MANUAL

Advertisement

Advertisement


2 of 7 07/09/13 2:16 PM


3/7

Dig Deeper: What Loan O!!icers Want

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.

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."

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 appliesto 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

8 Things Wildly Successful PeopleDo BY JEFF HADEN

CUSTOMER SERVICE

Put LinkedIn to Work For You: 7Ways BY KEVIN DAUM

LEAD

4 Working Styles: What's Yours?BY SHELLEY PREVOST

MARKETING

Why Networking Doesn't WorkBY ERIC V. HOLTZCLAW

Advertisement


3 of 7 07/09/13 2:16 PM


4/7

LLAASSTT UUPPDDAATTEEDD:: JJAANN 3311,, 22001111

EERRIICC MMAARRKKOOWWIITTZZ reports on start-ups, entrepreneurs, and issues that affect small

businesses. Previously, he worked at Vanity Fair. He lives in New York City.@EricMarkowitz

Tweet 147 PRINT THIS ARTICLEEMAIL THIS ARTICLE

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

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

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

SSEELLEECCTT SSEERRVVIICCEESS

Undesk your desk phone

ShoreTel Dock for iPad/iPhone. BYOD better.

HP Officejet Pro

Professional color. Professional impact. 50% less cost

per page than laser.

Canvas Network

A whole world of open online learning defined by you.

Old Dominion

No matter what you ship, your business is ourbusiness. Visit odpromises.com.

New Data on Success

New book BUSINESS BRILLIANT by Inc.com blogger

Lewis SchiffShareShare Like 84

OWNER'S MANUAL

8 Things You Should NotDo EveryDay BY JEFF HADEN

LEAD

6 Ways to Be Successful andHappy BY STEVE TOBAK

READ MORE

Why Online Marketing CollateralMatters BY RENEE ORICCHIO

0 SHARES

Innovating the SBA Loan ProcessBY JASON DEL REY

61 SHARES


4 of 7 07/09/13 2:16 PM


5/7

Add your comment4COMMENTS

I really enjoy reading your blog and its amazing for my need. I find your suggestions very useful, i'm

sure many people come to like your blog and gain benefit from it. Thanks for sharing.

Quick bad credit Funding0 LIKE | REPLY

AUGUST 21, 2013 AT 12:18PM

ddaanniiaalllloouuiiss..ddll

Useful report plus a great position. Some individuals can not "self-motivate" them selves to perform

the best factor, and also to perform for the ideal of their abilities, simply because oahu is the right

action to take, along with since most of us really should push ourselves to perform your ideal from no

matter what vocation most of us opt for.

Small Business Funding in California0 LIKE | REPLY

MAY 30, 2013 AT 2:44PM

DDeellmmaarr CCeelliinnoo

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.com0 LIKE | REPLY

NOVEMBER 23, 2012 AT 12:44A

M

aallbbeerrtt ggeeoorrggee

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.0 LIKE | REPLY

FEBRUARY 4, 2011 AT 8:35PM

MMiicchhaaeell

10 Extreme Bootstrapping Ideas

1.6k

SHARES

STARTUP

5 Things VCs Want You to KnowBefore You Pitch BY JESSICA STILLMAN

205

SHARES

MONEY

Who's Holding Your CompanyBack? BY ED POWERS

157

SHARES

MONEY

5 Reasons an Auction Is the BestWay to Sell Your CompanyBY MAX SAFAVI

39 SHARES

MONEY

Have You Hugged Your (Cash)Cows Today? BY JOHN WARRILLOW

212 SHARES


5 of 7 07/09/13 2:16 PM


6/7

SUSTAINABLEBUSINESSES ARECASH-NEUTRAL. SAYNO TO FAMILY MONEYBY HOWARD A. TULLMAN

138 SHARES

MONEY

MONEY

How to Get Your Series A MojoBack BY MARK SUSTER

139 SHARES

BY JANA KASPERKEVIC

A new survey shows U.S. investorconfidence dropping for social media--andincreasing for biopharmaceuticals.

Is the Social Media

Frenzy Over?

177 SHARES

MONEY

BITCOIN: MOREREGULATION, MOREOPPORTUNITY?BY ERIC MARKOWITZ

204 SHARES

MONEY

MONEY

Why Your CFO Needs a CurriculumBY THE BUILD NETWORK STAFF

88 SHARES

MONEY

The Danger of Mentor/InvestorWhiplash

34 SHARES

MONEY

5 Money Moves EveryEntrepreneur Should MakeBY ALEXA VON TOBEL

639 SHARES


6 of 7 07/09/13 2:16 PM


7/7

BY JOSH LINKNER

Whatnotto do: Your helpful guide to losinginterest and alienating venture capitalists.

5 Surefire Ways to

Tank a Pitch

289 SHARES

VENTURE CAPITAL


7 of 7 07/09/13 2:16 PM

5 Tips for Using Collateral to Secure a Small Business Loan

Documents

Transcript of 5 Tips for Using Collateral to Secure a Small Business Loan