Assets are used as collateral to secure payment if the loan goes into default. The collateral used for securing the loan will determine the amount of the loan.
Preparation is most important when applying for a secured business loan.
The requirements are different and you can expect for a lot more paperwork Below are a few items which can be used as collateral along with tips before you apply.
Types of Business Collateral
The business owner can pledge a mortgage interest in real property as security for a business loan. That real property can be commercial or personal residences. However, pledging personal residences as security may cause conflicts with lenders and borrowers.
A lender may justify this requirement by seeking to secure the personal guaranty of the business loan. Business owners may choose to pass on type of loan as foreclosure is too risky to pledge your personal property.
A lien interest in personal property may be pledged to secure a business loan. If the business owner chooses this option the following documentation is helpful to evaluate the assets:
- Price Quotations
An automobile, in good condition, can actually be used as collateral. Of course you must own the automobile free and clear and the following documents must accompany the loan application:
Accounts Receivable and Inventory
Borrowers can pledge current business assets as collateral but should be aware that certain documentation helps lenders properly evaluate the assets and may be required.
- Inventory valuation
- Inventory report
- Bad debt schedule
- Age of accounts receivables
- Borrowing base certificates
- Customer lists
Borrowers may pledge a security interest in the cash surrender value of a life insurance policy to secure a business loan.
Business owners with this type of collateral may pledge security interest to secure a business loan. Borrowers should be prepared to present the lender with brokerage statements or a schedule of the securities portfolio with up-to-date market price quotes. If the borrower is using closely held securities as collateral, a memorandum regarding the method of valuation and recent financial statement of the entity should be prepared.
Deposit Account or Certificates
Lenders will require a schedule of accounts if depository accounts are used as security. The type of account, current interest paid, maturity date and name of the depository along with recent statements should be given to the lender. IRA accounts, 401k accounts and Keogh accounts cannot be used as collateral. It is against the law.
Small business owners are sometimes ill-prepared when applying for secured business loans. Current, detailed, itemized and in some cases professional reports, must accompany loan applications.
Borrowers are sometimes surprised at the low valuation lenders give to collateral assets. Be prepared for the lender to discount the market values of collateral assets as the lender must maintain a safety margin to counter depreciation of the assets.
Borrowers can protect themselves from a lender’s conservative valuations by providing the lender with recent comparable sales records for real property, advertisements and reports on similar assets to those offered as collateral.
Collateral is an important determinant lenders use to qualify secured loan applications. To move the process along as smoothly as possible, prepare a precise itemization and description of your collateral before submitting the loan application.