How much collateral is enough to receive a favorable review of your small business loan? Most bankers, or institutional lenders want as much collateral as they can get away with. How do you present the package will control how much collateral you end up forking over to the banker.

How much of a down payment do you need to buy some thing, be it a property or a vehicle?

The rule of thumb is whatever you are prepared to come up with to make the deal.

So, let’s look at this from the lender’s point of view, first, shall we? Thank you, we shall!

When a lender looks at a loan package, they tend to look at the numbers first. This will be information such as cash flow projection, balance sheet and profit and loss statements. Next, they will look at assets owned and the balance on them. Again, all of this will be hard values and somewhat difficult to manipulate one way or another. Finally they will look at your credit history for your ability to meet the new obligation and your ability to continue meeting your existing obligations, as well as your past history with those obligations.

Given all that, what do you think their decision will be when you apply for a loan that is within the average of your total borrowing? They will welcome you and give you the best seat in the house. You will receive a brand new toaster and a fifty cent pen to remember who you were giving your business to. Your interest rate will be calculated based on a very difficult program that would take you years to understand let alone use – just kidding! In all probability the interest rate will more than likely be based on your personal credit rating.

What happens when you have a lot less blue blood, I mean collateral?

You are out of luck. Actually, what will most likely happen is that your loan will be considered based on a number of other factors, the most important one will still be your credit rating or score. The lower your score the worse your chances of an approval will be but you won’t be told that. What you will be told is that the lender is not looking at lending for your type of business and thanks for coming in and don’t come again, you hear?

How do you get around low credit score, low income, low assets, and no business history?

There are several ways to do this, and for now, we’ll just go with these five:

First, be extremely well prepared. If you are going to be borrowing for a specific type of business, you will need to have a polished, crisp, and very clear business plan. And, you should know more about your industry than it has been written. Over flow with numbers about your industry, such as when it started, how many people are employed, what the average sale is, and so on and so forth.

Next, make sure that you have thoroughly investigated the market and your business plan numbers aren’t made up (to a certain extent they will probably be totally made up, specially if you are a brand new business) but make those numbers up within the boundaries of the industry. Cash flow statements, projections, and so on, these need to be very believable. After all, if you exaggerate here, where else will you be exaggerating?

Thirdly, be very clear about the lender you have chosen to present your prized possession. The lender will already have made loans to other businesses and it will be a simple process to find out what those businesses are and what their loan limits, averages are. Stay within those and you will be welcome. Stray from those and you will be shown the door.

Fourth, be as professional as you can be. If you are a painter and wear clothes that show exactly what you do, don’t go visit the banker on those clothes. The banker doesn’t expect you to come in and paint the store. He expects you to behave as a business owner who doesn’t get his hands dirty (as if they only knew!)

Finally, make sure you have a backup plan. This could be a friendly accountant or attorney who knows someone who is wealthy and is looking to invest a few thousand in the next Bill Gates. Or, find someone who is well known in the business circles who can vouch for you.

In the final analysis collateral is probably the last thing you will be looking at or will need to consider when presenting a loan package to a lender. Your collateral will be brought up when the lender wants an assurance of your ability to pay the obligation. In a situation like that, negotiate for the lowest collateral possible and if that doesn’t work, negotiate for a release of a percentage of the collateral over a short period of time, say 25% of the collateral released after 3 months, or 6 months, or whatever you can negotiate for. It’s your asset and you want it to stay that way.

JoCee is an enthusiastic and optimistic small business financial consultant and has created several articles to help you negotiate through the maze of financing your small business. Check out business loan options at http://start-business-loans.com/businessloan.htm for more information on how to find alternative sources of financing.

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