Key Advice Regarding Collateral for Business Loans
However, the collateral for business loans that we require is actually integrated with the respective funding solutions themselves:
- Our equipment financing uses the equipment to be purchased as collateral.
- Our purchase order financing uses the actual purchase order(s) as collateral.
- Our invoice financing uses actual invoice(s) as collateral.
The reason for this integration is simple: it is clearly beneficial to our customers for us to operate this way, since they do not have to pledge any additional collateral for business loans — such as buildings, vehicles, securities, cash, and so on.
Calculating the Value of Collateral
What’s more, evaluating how much the collateral is worth is fast and straightforward: $100,000 worth of equipment to be purchased is worth $100,000, $50,000 worth of invoices is worth $50,000, and $75,000 worth of purchase orders is worth $75,000. There’s no grey area.
Traditional Lending Tells a Different Story
However, this IS NOT the case with banks, where collateral for business loans is a very different story!
For example, in order to obtain a conventional secured bank loan, a borrower may list their building as collateral and assign it a value of $150,000. This amount may be perfectly legitimate, and it would take all of 30 seconds to find a similar property in the same area and determine the value. Or within a few minutes, a dozen commercial real estate professionals could be asked to assess the value, and they would all come back with the same (or very similar) value.
What’s the problem here? It’s this: borrowers don’t get to choose who evaluates their collateral: banks do. And banks are notorious for under-valuing collateral. Instead of assigning a value of $150,000 to the pledged asset (i.e. the building), they are likely to assign a value of $125,000, $100,000 or maybe even $75,000.
Why do Banks Do This?
It’s simple: it lowers their risk threshold. Frankly, the last thing that banks want to do is take possession of collateral and liquidate it. They aren’t in the repo business. However, if they are obliged to take that drastic action, they want to be 100% sure that they still turn a sizeable profit.
At the same time — and this is even more of an eye-opener for all of the wrong reasons — banks under-value collateral to filter out small business borrowers, but without having to publicly state that they’re much more interested in going upstream and serving large businesses (which is the truth, but doesn’t look great in a press release!). Indeed, it’s much more agreeable for a loan officer to say “hey, if it were up to me I’d love to give you the loan, but the bank wants $500,000 in collateral and all you have is $250,000.”
How We Help with Collateral for Business Loans
When banks make the rules, borrowers have little leverage when it comes to getting funding. That’s the bad news. The good news is that banks aren’t the only option! As noted above, here at National Business Capital we offer secured business loans that use integrated assets as collateral. We also offer a full range of unsecured funding solutions that don’t require collateral for business loans — period!