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Small Business Advice on Collateral Assets


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As credit tightens, the fundamentals of business borrowing still apply (maybe now more than ever). The borrower puts up collateral that he or she can “borrow against. " The lender then has something to seize if things turn ugly.

It's no secret that some lenders are paying the price for making loans secured by little more than a sharp suit and overly optimistic sales forecasts. Borrowing money today typically means providing real collateral to secure the loan. According to the National Federation of Independent Businesses and other sources, small businesses can respond by looking at leveraging various kinds of collateral to get credit. Consider the following:

Collateral: your reputation and history with a bank

If you've done business for years with a bank, you may have "relationship banking" going for you. Relationship banking is the term for the value a bank gives to your past relationship. It also factors things such as the bank officers’ subjective appraisals of your management team into lending decisions. Check with loan officers at your local bank to see whether they'll include these considerations.

Collateral: A wider definition of “assets"

Asset-based financing is a bit of a redundancy - all loans are secured by “assets" (real or imagined). But the term today applies to a trend of widening the definition of “asset. " Perhaps your business owns assets rarely used for business, such as extra machinery or real estate. If it has value that can be documented, it may help you secure that loan. Some companies can get more creative and use intellectual property - such as trademarks and patents - as assets to secure loans. If your business has customer lists, these may have value as well.

Collateral: Accounts receivable

Your accounts receivable - money your customers owe you - have value that could make them collateral for an asset-based credit line. Or they might help you acquire accounts receivable financing - a term for generating a quick cash infusion by selling your outstanding invoices to another company at a discount. The buyer then assumes the risk for collecting these accounts, and the amount of discount you sell depends upon how likely the debt is to be collected. The older the debt, the larger the discount.

Collateral: Your continued business

Your status as a client has value to your suppliers - your business helps keep them in business. Hence the practice of supplier- or vendor-based financing. Your major suppliers and vendors may put their money where their best interests are by extending favorable trade credit terms. For example, they could offer your business a discount if you pay invoices in full within 30 days, a lesser discount within 60 days, with full payment due in 90 days. You may do the same with the businesses you supply, providing incentive for them to pay you as quickly as possible, and in turn keeping your cash flow in good shape.

Collateral: Your ability to boost economic development

Many state and local governments have little-publicized state and local government lending programs that could offer everything from support services to loan guarantees. And check out the Small Business Association. While they don't lend money directly to small businesses, they do have a number of loan programs in which they act as a guarantor of loans made to small businesses.

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