Business Tip #12 - Collateral

A few weeks ago I outlined the five c's of bank credit. One of those "c's" is collateral.

The bank will consider all the following business assets as collateral.

Accounts receivable - banks may loan factor anywhere between 50-75% of outstanding receivables for a collateral base. A great depends on the quality of the receivables such as age, quality of customers, industry, etc.

Inventory - banks may advance anywhere from 25 - 50% on inventory values. Again much depends on the quality of the inventory. Is the inventory commodity in nature? Is it easily subject to theft and/or spoilage?

Real Estate - In general, most banks will advance up to 80% of the value of real estate. Again, the marketability of the real estate is important. Does the real estate have wide spread appeal and/or market. What is the real estate market doing in general?

As I inform clients, most banks will not lend strictly on asset values without corresponding cash flow. It's almost a chicken/egg game.

As an example. Assume you have inventory "worth" 100,000 retail value. A bank would be hesitant to loan up to the $100,000 value. Why? Because if you cannot turn around your inventory to pay off the bank, the bank isn't going to be able to do it either.

So it's important to realize that the turn of assets into cash is what the bank tries to evaluate. If you cannot turn your business assets into the cash that will be used to pay back the bank, your collateral will have little value to the bank since they will have a hard time liquidating your collateral to cover any debt balances.