Too Much Collateral! 4 Ways to Stop Lender Asset Hoarding

A lender has approved a business loan, but they want too much collateral.

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

Apply below for either bank statement loans that do not need your assets or only take the minimum amount required.

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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 the lender has before  you apply

Finding out during the loan process that the lender wants collateral you don’t have or don’t want to offer is too late, and a waste of time.   Ask before you apply.

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

Do not voluntarily give the lender a full asset listing without their request.  You may be required to provide a listing of you assets later.   First give a general description and total valuation such as on a short form personal financial statement.

This prevents the lender from automatically asking for, then taking all of your assets as security for the transaction.      Don’t give the lender something valuable they did not ask for and require upfront.   If you do, then there is a good chance you gave away assets to them.   Compare their loan offer to the value of your assets.   Calculate the loan to value, or LTV.

3. Negotiate the assets required 

Many lenders will automatically take the most and best collateral you have, even if it may not be required to cover the lender’s money.   Banks, Savings and Loans, 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 lenders to take only the collateral 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 loan 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 loan balance usually goes down much faster than the value of the assets.   Sometimes, asset values go up instead of down.

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

Another option is to getting a lender to subordinate their debt to a new lender. If your business is approved, the new lender may not want to take a lien position behind some existing lenders.    If you want to close the loan, you can approach the existing lenders and ask them to let the new lender prioritize their lien position higher than the existing lender.    The existing lender will need to complete a subordination agreement.

Equipment transactions can be handled the same way.   Agree ahead of time with the lender that they will release equipment pieces as you continue to pay the loan down.   It is not likely the lender will do this if you have not negotiated this ahead of time.   If the lender refuses, push them on this point.

Since the balance will go down faster than the value of the collateral,  show them that their collateral position should not get better than when the loan was first closed.


FAQ:  Keeping a Lender from taking too much Collateral:

What is too much collateral?

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

Can the lender take as much collateral as they want?

Lenders take as much collateral as they want and as you are willing to give them.   Do not offer all of your assets in advance and without negotiating to offer 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 collateral terms right after an approval.  This is when you have the most leverage to get any changes you want.

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 lender, 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.

Getting a Business loan: Discuss Amounts with Lender

When applying for a business loan, there are many actions the applicant can take to increase their chance of being approved for the request.   One way is to discuss the requested amount with the lender at the beginning of the process.

Lenders often ask the borrower for “the amount of the request”.  A mistake that many borrowers make is believing that if they request twice what they want, they will be more likely to be approved for the real amount they want.  This is not true.  Doing this does not work and will more likely cause the application to be declined.

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Get a business loan and discuss amounts with lender

Time in Business – The longer the time in business, the higher the requested amount can be for.   If the time in business is less than 2 years, amounts over $25,000 or $50,000 become difficult and are the maximum that should be considered in most cases.

Business Revenues – The amount of revenues a business generates is a big factor in determining the amount the business should apply for.   For example, a business that has $150,000 in revenues has virtually no chance of being approved for a $250,000 loan request with the vast majority of lenders.   $25,000 to $50,000 maximum would be in line with what a lender would consider for a company with annual revenues of $150,000.

Personal Credit – For most businesses, the owner(s) of the business must sign at closing on the loan and their credit will be reviewed.   Often, the stronger the personal credit is, the higher an approval will be for.

Business Credit – Business credit is often looked at.  If you know that the business has good business credit, a higher amount can be applied for.  Business credit files can be accessed at business credit reporting agencies such as Dun & Bradstreet, Experian Business credit and Paynet.

Financial Statements –  For many business loan requests,  the lender will ask for financial statements.   This is often called financials, or full financials.   It almost always includes the last 2 years complete business tax returns.  It may also include 2 years personal tax returns, a current personal financial statement, an interim year profit and loss statement with balance sheet and the last 3 months business checking account statements.   Lenders will look at the returns to determine Gross Revenues and Net Income.  If these statements are strong, a higher amount can be requested by the applicant.

In summary, when applying for a business loan, consider the factors above in determining how much to apply for.   Applying for the right amount will often assist your business in securing an approval for the amount it needs.

How to make sure the lender will like your financial statements

As a small business owner,  you or your accountant are completing your financial statements which includes your tax returns.  Make sure some basic numbers are correct to look attractive to potential lenders and investors.

Showing net income on your financial Statements

Showing a net profit is important. Many lenders will decline your business loan request if you do not show a net income? Why? You do not have enough business income to make the payment on any new loan.

Proof of income

Having financial statements with net income also serves evidence of income. Other items that show as proof of income include:

  1. Business Tax Returns
  2. W-2 Statements or employment pay stubs
  3. Business bank statements
  4. Balance sheets, profit and loss statements and financial statements

Gross income and net income are not totally in your immediate control.   An increasing gross receipts figure is a major number lenders look at .    Are sales increasing?    Increasing sales are extremely appealing to potential lenders and investors.   The business is heading in the right direction.

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Net income and taxable income: closely looked at figures

Is the business profitable?    The lender will look closer when gross income is increasing but net income is still low. Sometimes amortization and depreciation are handled differently from one year to the next.

Officer salaries may have increased on the corporate return for accounting reasons which lowers the net income figure.    However, if expense figures are handled the same from one year to the next, the lender will expect net income figures to at least remain the same or increase.

Many lenders will not intensely scrutinize requests under $100,000.  other figures, such as retained earnings, cash on hand, or request a personal financial statement to review listed stock, stated value of business, real estate holdings, and other assets, nor itemization of debt that appear on a personal financial statement.