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Collateral Damage in Lending

Guest post by: Carl Moore

Article Overview: According to one of the nation's largest small-business lenders, basic underwriting standards haven't changed: Cash flow must be sufficient to support the loan, and there must be a secondary source of repayment. That collateral was typically a combination of accounts receivables, inventory, real estate, equipment, and other business or personal assets. But since real-estate and equipment values have plummeted, business owners who may have landed loans in the past are now falling short of having sufficient assets. Cash can make up the difference.

Collateral Damage in Lending

Behind the credit squeeze on small business lies the collateral gap. Many small businesses, thwarted in efforts to get loans, are saying it takes money to get money. That's because property and equipment assets have fallen in value, so businesses seeking loans are being asked for alternative collateral, often in the form of cash so that the loan is backed in case the borrower defaults. The catch for most business owners is that if they had money sitting in reserve they wouldn't need a loan.

According to one of the nation's largest small-business lenders, basic underwriting standards haven't changed: Cash flow must be sufficient to support the loan, and there must be a secondary source of repayment. That collateral was typically a combination of accounts receivables, inventory, real estate, equipment, and other business or personal assets.

But since real-estate and equipment values have plummeted, business owners who may have landed loans in the past are now falling short of having sufficient assets. Cash can make up the difference.

Most banks, primarily focus our small-business lending on cash-flow analysis. If the cash flow won't support the loan, they ask or will accept marketable securities and deposits as collateral. In other words, owners need to put cash in a certificate of deposit or an escrow account that can essentially guarantee the loan in case of default.

In some cases, hard assets, personal guarantees and cash appear to cover the loan balance several times over. The quick-sale of hard assets may amount to only cents on the dollar and lenders have to satisfy examiners.

The recession and shifting demographics will swell the ranks of people who will rent, not buy, housing over the next five years.

The American dream of owning a home is still very much alive, but it will be no more than a dream for a growing number of people over the next five years. That's bad news for home builders, who already have big troubles, as June's reports on housing starts, existing-home sales, building permits and unsold-home inventories showed. But it is good news for anyone renting out a home, apartment or condo, or any real-estate investment trust specializing in residential rental properties.

Most U.S. households own the dwelling they live in, and that isn't likely to change. But demographic and economic forces, together with some perversities of government policy, are combining to push the share of ownership back to where it was in the early 1990s. Already, in the wake of the housing bust that brought on the Great Recession, the share of U.S. households owning homes has slid steadily-from 69% at its peak in 2004 to 67.2% in this year's first quarter. And the rate is likely to fall to its 1993-94 level of 64% by 2015.

The flip side of this trend is a rising rental rate, which probably will hit 36% by 2015, versus 32.8% in 2004. Every percentage-point increase represents nearly 1.3 million households, and the average household includes more than two people-so roughly 10 million extra folks could be moving into rentals over the next five years.

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Article Tags: accounts receivables, equipment loans, equity source, real estate financing, SBA loans, secondary financing



Related Forum Posts
Securities - Lending guru: I assume your securities offering has been registered - since you appear to making a general public solication
How to get financed - We looked at doing the same thing. Problem is you own the truck out-rite, so most require a add on to your title or release of title to them for liability should you default. Contact Kevin at RV Lending, he assisted us with our stacker transporter, pretty easy to deal with and straight up with the answers before you give all you personal information. Good luck
Getting financed for conversion on an older truck - We looked at doing the same thing. Problem is you own the truck out-rite, so most require an add on to your title or release of title to them for liability should you default. Contact Kevin at RV Lending, he assisted us with our stacker transporter, pretty easy to deal with and straight up with the answers before you give all you personal information. Good luck
Re: Bad credit guaranteed home loan? - Lending money to people with bad credit was one of the biggest things that put our economy under and many lenders out of business. I'd say if you have this opportunity take it now before it goes away. Trust me, if there are any of these programs left (and don't expect a low interest rate if your credit is bad) they won't be around for ever. At ANY interest rate.
Free Commercial Lending Seminar - Holding Seminars is also a great way to get people into your sales funnel. It's establishes yourself as an expert in the field and builds trust. You can use direct mail or advertising to get the word out about your seminar. A Listing with the local Chamber is also good as you'll benefit from the trust they have built with their members. Offer the seminar for free and remember to hold some sort of door prize to capture peoples contact information. This method will require some creativity from you as your dealing with the Commercial Lending market but take an angle where you will show decision makers (maybe over lunch) how they can save thousands of Dollars on their current loans.


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