February 17, 2011

Five Tips to Overcome the Small Business Collateral Crisis

Small business owners and entrepreneurs across America are struggling every day to find acceptable collateral to use to secure loans. With the declined values in commercial and residential properties, most small business owners have little equity left inm their real estate that they can use to secure loans. They (and we) need these loans to grow their companies, hire employees, and get our economy moving again. Despite this tough lending environment, there are options to get business loans. Here are some suggestions about how to do so.

1. HOW MUCH COLLATERAL DO YOU HAVE?

The first thing a lender looks for is how much collateral a borrower has to offer. This will affect the type of business loan you get, and the rate you will pay for it. As a general rule, you should make a spreadsheet that lists your assets, and what you owe against each asset. On residential real estate you should deduct 25 percent off of the current market value, and then subtract what you owe on it today, to determine the collateral value. For commercial  real estate, deduct 20 percent off of the current value, deduct 20 percent for current receivables, and 50 percent for inventory. This is a starting point to figure out what collateral you have to offer a lender.

2. FIGURE OUT WHAT KIND OF LOAN YOU ARE MOST ELIGIBLE FOR AND FOCUS ON GETTING THAT TYPE OF LOAN.

Based on the collateral you have, speak with an advisor or do some research to figure out what type of loan works best for you. For example, if your only collateral is receivables, you will probably focus on a factoring loan. If it’s equipment, you might look for an equipment lease.

3. GET YOUR FINANCIAL HOUSE IN ORDER.

Applying for a loan is like applying for a job. You wouldn’t go to an interview with a resume filled with typos, and you should not go to a loan interview without complete, accurate, and timely financial reports. Take the time to get your house in order before you apply. And if you need help, hire an accountant or bookkeeper.

4. LOAN CONSOLIDATION IS OFTEN THE TRICK TO GET THE JOB DONE.

If you’re an existing business with outstanding debt and are looking for new money for a new initiative, it’s smart to look at your entire picture versus just trying to get a new loan. It often makes sense to consolidate loans, and clean up and reorganize old liens.

5. PAY ATTENTION TO YOUR CREDIT SCORE.

When is the last time you checked your credit score? It’s one of the first things a lender will do and it’s important that you check it out before they do. If there are problems or inconsistencies, now is the time to hire a reputable credit repair service and fix them. It is also important to track your credit regularly.

Ultimately, there are loans available for small business owners and entrepreneurs. Hopefully these steps will help you get to the goal line faster.

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