Truth About Collateral for Commercial Loans
Being new to the business of commercial lending, I had a rather skewed view of collateral and the importance of it when making a loan. As time has progressed, I not only realize the importance of securing collateral when making a loan, but the absolute necessity of having it. First things first: what is collateral and why is it necessary for obtaining a commercial loan?
Collateral includes anything and everything that a lending source can take a security interest in, including machinery, vehicles, inventory, accounts receivable, real estate, notes receivable, and investment accounts. This is done to avoid sounding too simplistic. You may be wondering why lending sources seek out security interests in these assets. I’m glad you inquired about how to reduce their risk of loss in the event that the loan is not repaid. No one has ever been able to predict the future with any degree of consistency, and nothing in life is guaranteed, just like in our personal lives. In order to have a measure of confidence of not only being repaid, but also to cushion the blow in case life happens, banks secure assets as collateral.
Depending on their use, age, and resale value, the assets you might have to use as collateral have a certain amount of marketable value. For startups and businesses in the early stages, understanding the value of collateral is essential. The second objective for a startup or early stage business is to acquire assets with some ownership interest or at the very least a controlling interest, in addition to becoming cash flow positive as quickly as possible. When applying for a commercial loan, achieving these objectives early on will be very helpful. It not only reduces the risk of your business, operations, and collateral in the eyes of the lender, but it also gives you the chance to get a loan with better terms.
