Over the past several weeks I’ve blogged and talked in the press about the collateral crisis facing small businesses. Essentially, with the declined values in commercial and residential properties, most small business owners have little equity left in their real estate that they can use to support loans. And they (and we) need these loans to grow their companies, hire employees, and get our economy moving again.
At MultiFunding, we have the unfortunate role of telling dozens of entrepreneurs and small business owners every week that they don’t have sufficient collateral to get a loan and jump start their dreams. We encourage them to go ask a parent, rich uncle or friend to put up some collateral so they can get the job done. Unfortunately, most aren’t in that situation.
So here is a suggestion. How about we create “individual future earnings” as a form of collateral? A loan agreement would look something like this: If after X amount of years, the loan has not been paid back or goes into default, the lender has the right to take an ongoing percentage of the borrower's earnings until the obligation is paid off. We could use mechanisms and infrastructure that we used to enforce child support payments to get the job done.
There would be risk in this form of collateral for a lender. They would have to look at the historical earnings and income tax returns of a small business owner, and forecast future earnings. Unfortunately, sometimes borrowers might get disabled or have life changing events. But ultimately lenders take risks, and this should be able to be assessed and evaluated.
Our lending system is in desperate need of innovation. We need new ideas and new solutions to respond to our new economic reality. How can we build a forum to evolve, discuss, and debate these ideas? I welcome your thoughts.