Collateral for a Loan
Are you going to pay me back the money you borrowed?
This is the one and only question your lender wants answered prior to giving you a loan. So why do you have to answer the countless questions? Like it or not we all have our own “valuation” system that is almost as unique as fingerprints.
While most of us tell the truth, we have a tendency to inflate our valuation quite unintentionally. Any value below our valuation is not be taken well and sometimes looked at as being deceptive and predatory. Here is one example: you buy a brand new car for $25,000. You have a change of heart and want to return it. Did you know that you could lose as much as 20% from the minute you drive off the dealership according to eHow!?
Let’s say you are applying for a loan after a month you bought your car. What would you list the value of your car to be? Before you answer, think about how much you would have paid for the same car at an auction or a forfeited property sale by a bank. Why? This is the value your lender is going to get if you fail to replay your loan. But you are going to pay off the loan right? How does the lender know for sure? And the questions start….
Collateral is the property, cash or other valuables that you will put up as security for a loan. If you do not pay back your loan, the lender will probably take possession of the collateral and sell it to pay off your loan.
Collateral can be any of the following but will mostly depend on your lender discretion:
- Commercial Real Estate
- Residential Real Estate
- Computer Equipment
- Other Equipment
- Certificates of Deposit
- Stocks and Bonds
- Account Receivables
- Any Other Asset
According to the U.S. Small Business Administration, every loan program requires at least some collateral. Here is a grid from its website that lists collateral items and value assigned in general to each item. If you were not able to secure funding and are pursuing a guaranteed SBA loan, its valuation varies a little. Always remember, the ultimate decision as to the value of your collateral is going to be made by your len Raj Nisankarao, Rajrae Enterprises