Business Funding Secrets
Business Funding Secrets

Low Collateral Loans

by Brad MacLiver, authorship and profile at: Google

 

Collateral is an asset pledged to assure the repayment of a loan. Assets used to collateralize a debt are typically real estate, or equipment. Traditional lenders may require collateral of more than 100% of the loan due to the fact there are expenses when a loan goes into default, and the asset must be repossessed by the lender, and then sold to recoup the amount for the loan and expenses.

 

Many Clients looking for funding do not have the asset base to qualify for traditional collateralized lending. No collateral - no loan. However, there are specific lenders who can structure financing for certain types of businesses in a “low collateral” situation.

 

Companies offering professional services are one target that some Funders will lend money to when there is not the asset base to secure the loan. Medical practices, law practices, and accounting firms are examples of professional businesses, which often have balance sheets without extensive long-term assets. Many professional businesses conduct business in a leased location. The value for furniture, fixtures, and equipment is minimal, and these items may be old enough to have already been fully depreciated. Yet these businesses may be generating millions of dollars of revenue - little to no collateral, but great revenue. There are other types of professions that fall into this Low Collateral category too.

 

 Even with great cash flow, a professional company may be in a situation where they want or need a business loan to accomplish:       

  1. Partner/Shareholder Buyout
  2. Equipment Purchases
  3. Leasehold Improvements - The improvements to leased property made by   the lessee.  Under common law, improvements constructed by the lessee on   the leased premises would revert to the landlord at termination of the lease.
  4. Business Acquisition - Often it is easier to expand a business through   acquisition of a competitor than through attempts of capturing more market  share through other means.  More on acquisitions in up coming issues of Business Funding Secrets.

 

When lenders accept transactions with minimal collateral they will, in exchange for the business collateral, want the owner to offer security through other means. The borrower must possess a proven track record showing strong historical cash flow for at least 3 years. Contracts and customer files provide documentation of the strength of the business. General management must have 2, or more, years of experience in the industry.
 

Credit is always a consideration for all finance situations. When there is a lower credit score, this provides the lender with the perception of higher risk, which results in higher interest rates and the need for additional security. In lower credit situations the business owner may be required to provide additional security through personal guarantees, cash values of life insurance policies, or equity in their personal or vacation residencies. 

Clients who are pursuing a low collateral type of loan may have already approached their local bank and have been turned down. When a low collateral lender shows interest in a project the business owner needs to provide the required documentation and be prepared to offer security for the business loan through personal assets.

 

Although a big factor of low collateral loans is the strength of the businesses cash flow, understand these are loans and should not be confused with factoring. Low collateral loans can have competitive interest rates, up to 90% financing, and terms of 7-10 years. Loan sizes are usually between $250,000 and $5,000,000.
 

Due diligence must be completed to assist the lender in verifying the strength of the contracts and customer files. Business valuations, accounting audits, and other expenses to prove the soundness of the transaction are the responsibility of the borrower.

 

As in all lending circumstances - basic finance applies - the higher the risk, the higher the rate of return. Clients with credit issues will still have those hurdles to jump. Start-up firms without the historical data to prove their abilities will have difficulties with most types of funding, including low collateral loans. These loans are based on strong cash flow, so companies reporting zero to minimal cash available, again will have difficulties.  

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