Business Loan Collateral

When applying for a business loan, it's helpful to the lender, and facilitates consideration of the proposal, if you as the borrower provide thorough information about the assets to be offered as collateral. This data helps the lender to assess the adequacy of the collateral and to evaluate your overall desire to secure the loan. Generally, borrowers will not have the professional reports requested by the lender at the time of loan application, particularly for real property collateral. But any collateral information that you have available will assist the lender in understanding exactly how you intend to secure the loan.

Most of the collateral's valuation or analytical information will need to have been prepared very recently if you intend to use it in your current loan proposal. Appraisals, environmental reports, and even surveys that are more than six months old may be useful as guidelines, but are likely to be considered stale by the lender in terms of actually being able to rely on their data.

Be aware that there may be significant differences between the lender's impression of the value of the collateral and your own. Lenders discount the market or cost values of collateral assets when determining the adequacy of the collateral for the requested loan. This discount is necessary, since the lender has to maintain a safety margin to cover the possibility of liquidation costs should arise. Lenders can, however, at times be too conservative in determining the valuation of specific collateral assets. When this occurs, you may be able to address the problem with more information which demonstrates the actual value of the asset in question. For example, providing the lender with recent comparable sales records, advertisements, or other data that might have been overlooked can help to establish the value of properties similar to the collateral. This supporting information may give you the opportunity to negotiate a better leverage (percentage of the asset's value) amount for your collateral.

When the loan proposal is approved, lenders will offer terms based on the requirement of certain assets being encumbered as collateral. Sometimes they can go beyond prudence, however, suggesting a ridiculous amount of collateral just because the assets are available on your balance sheet which can eliminate virtually any potential risk to themselves from making the loan. But loan commitments do not have to be the final word. You as the borrower can always refuse the lender's offer and try to convince him or her to amend the deal to reflect more reasonable terms. Remember, everything is negotiable. Qualified borrowers can often find other lenders who are hungrier for their business.

You should resist the lender's inclination to secure too much collateral. Challenge the lender to justify the quantity of collateral requested and the method used to determine its adequacy. Although this may not change the lender's requirements, it could ultimately cause the lender to either reconsider the leverage of certain assets, or provide you with a better interest rate which reflects his or her lower risk on the deal.