Free and Clear Collateral: What does it mean?

What is free and clear collateral?

Any asset owned fully outright. There cannot be any liens, encumbrances, debt of any kind on the asset. Ownership is by a person, business, or organization.

What can a business owner show to prove free and clear collateral?

Examples of Free and Clear collateral issues.

A business is approved for a small business loan. One of the closing requirements is for the owner to prove they own the collateral outright.  The business has several ways to prove this.  For example, documentation to show clear title of assets are below.

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How to prove free and clear collateral assets:

Original title, or copy of front and back of title showing no lien holder (for titled assets).
Payoff letter
Release of lien notice
Proof of payments on any loan that was made to finance the purchase of equipment, vehicle, or real estate.
Copy of Deed:  Real estate transactions.
UCC report from the Secretary of State.
Paid lease or loan agreement.

So if you don’t have the types of documentation required for your business loan, contact us at SmallBusinessLoansDepot.com.   Why?  Because your business needs options right now.  We will help you figure out what you can provide to prove your free and clear collateral.  If not, then consider unsecured options.
For example,  bank statement loans do not require proving that your collateral doesn’t have a loan or lien on it. Click on the menu at the top listing for bank statement loan.

Free and clear collateral is also required for funding programs such as a loan against equipment, an asset based loan

So you don’t have proof the assets needed to close a business loan are free and clear and don’t know what to do?   The burden is on the business to prove their collateral is free and clear, not the lender. 

Sometimes business owners cannot find, or do not have the right documents to prove their business assets do not have a lien.
How can you still prove assets pledged do not have a lien on them if you don’t have one of the items on the list above?

 

What is free and clear collateral? How can I prove it is free and clear?

Frequently Asked Questions FAQ: Free and Clear Collateral

What is Free & Clear collateral?

Free & clear refers to any asset that is owned outright. Nothing is owed
against it and there isn’t a lien on it.

How can I prove I fully own it?

The original title or deed is the best way. A bill of
sale can be provided if the assets are not titled.

What collateral can I use?

Equipment, vehicles, Real Estate and Accounts receivables are
the most common types of collateral accepted by lenders.

Why is Collateral needed?

It is usually requested when the lender will not complete
an unsecured transaction with you and wants security for the loan.

What can I do if I don’t have enough?

You can ask for a lower amount or add additional collateral
if you have it.

How do I get the lender to release my collateral?

You must payoff the balance. Ask for a payoff and get proof of payment.
Find out when the lender will release their lien. If their lien is listed
with the State ask when they will request a lien release with the State.

Can I use assets that I still owe on?

This varies from lender to lender and is also based on the
type of collateral. Real Estate is usually the only type
of collateral accepted that is not free and clear.

Can I use collateral that is not in my name?

Only if the owner is also part of the same transaction. Otherwise
transferring the ownership to your name will be required.

Does it have to be insured?

Full coverage insurance will need to be in place before
the transaction closes. Ask your insurance company for a certificate
of insurance that shows the coverage amounts and lists what is covered
in the policy.

Will the collateral legally stay in my name?

The assets will stay in your name with the lender being listed as
the lien holder. You will continue to be the legal owner.

Lender resources to verify ownership of collateral

So why can’t the lender use their resources to prove the collateral is free and clear?  Yes, the lender does have resources they can use to check if assets are unencumbered, but they still ask the borrower to provide all the proof they have.  Why?   Because they want to look at the documentation the borrower has to look for any problems.   This also helps prevent businesses from getting loans using assets they may think they own, but don’t.   

Top 6 Fastest Business Loans available during Covid-19 Coronavirus

1 Cash flow loans or bank statement loans for Essential industries
2 Loans against vehicles or business vehicles
3 Paycheck protection program – PPP CARE
4 Business loans on Equipment
5 Advances on accounts receivables
6 Loans on Commercial Real Estate


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