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Too Much Collateral! 4 Ways to Stop Lender Asset Hoarding

Too much collateral is required for a loan.  What can you do?

Consider 4 ways to push back.  Make your case and keep as much as you can.

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How to keep a lender from taking too much collateral:

    • Ask about collateral requirements.
    • Don’t offer all of your assets upfront.
    • Negotiate the requirements. 
    • Negotiate lien releases during the loan.

1. Ask for all collateral requirements before  you apply

Finding out during the loan process that collateral you don’t have is required is too late. Ask what is needed before you apply.

2.  Don’t offer all of your Assets up front. 

Do not voluntarily offer too much collateral at the beginning of the process.  You may be required to provide a listing of what you own later.   First give a general description or possibly a personal financial statement.

This prevents the lender from automatically taking all of your assets as security for the transaction.      Don’t give them something valuable upfront they did not ask for.  Use this as a negotiating chip.  Compare their loan offer to the value of your assets.   Calculate the loan to value, or LTV.

3. Negotiate the assets required 

Many investors will automatically take as much as they can, even if it may not be required to cover their risk and exposure.  Banks and the SBA do this commonly.   Many will take 5 to 10 times as much collateral as they need just because they said they wanted it.  This contradicts what is expected with ethical business loans, but is standing in traditional banking.

After you have gotten an approval, push the funding source to take only the security they need.   They may refuse, but you should ask anyway.   Calculate the dollar amount of the principal + interest.   Figure out how much in assets they need to cover the debt and how much more they are requiring.   Check if assets are jointly owned if you have less than 100% ownership percentage in the business.

If their request far exceeds what they need to protect themselves, then present them with your calculations and valuations.    This will be your proof, best case, and put the most pressure on them to lower their requirements.

4. Negotiate a release of lien during pay down.

You pay down the balance during the term of the loan, beginning with the first payment.     The balance usually goes down much faster than the value of the assets.   Sometimes, asset values go up instead of down.

If multiple pieces of Real Estate are being held, then negotiate before closing.  Try to get them to agree in writing to release pieces after the balance has been paid down enough to still cover their debt.    A condition may be timely payments and no other violations of the contract on your part.

Another option is getting a lender to subordinate their debt . This may be required because the new funder may not want to take a lien position behind the others.    If you want to close the transaction, then you can approach the existing lien holders and ask them subordinate their position.  They will then need to complete a subordination agreement.

Equipment transactions can be handled the same way.   Ask for agreement ahead of time that pieces of equipment will be released from the lien as the balance is paid down.   It is tough to get this approved but make the request because late in the loan the balance will be low.

Since the balance will go down faster than the value of the collateral,  remind them that their risk position gets better every month after closing.


FAQ:  Keeping a Lender from taking too much Collateral:

What is too much collateral?

When lenders approve a loan and take much more collateral than they need to safely cover the balance if you default.  Banks routinely take excessive security on their transactions.

Can the lender take as much collateral as they want?

Funding sources take as much collateral as they want or you are willing to give them.   Do not offer all of your assets in advance without negotiating for less.
How can I keep the lender from taking all my assets for the loan?

Find out program collateral requirements from the lender ahead of time.  Negotiate the collateral terms right after an approval.  This is when you have the most leverage to get changes.

Conclusion

Many lenders often ask for all the collateral you have available.

Most people and businesses believe they do not have any say, influence or choice in this decision.   They do.   The borrower may not get the lender to lower their collateral requirements much, but they sometimes have success.  It depends on the source, the transaction, and how you negotiate.

Ask for reasonable concessions and justify your request.   This may include calculations, valuations and other proof.    You will get some of what you want more often than you think.