Small Biz Basics: Collateral Based Lending

Many of us are familiar with the process of buying, and financing, a car. Pick out the car you like, sign a few papers, and drive away! But, be sure to make those monthly payments, or the creditor will come back and repossess your car.

Because of this it is important to understand how much you can afford to spend so you get to keep your new car. Should you buy a Kia or a Ferrari? In addition, it is important to understand how the value of your collateral, in this case, your new car, played a role in the loan that you got.

This example of collateral is fairly easy to understand. You have a tangible, physical item that has value. Someone was willing to give you money based on the value of that object, with the understanding that you would pay them back. If you do not pay them back, this someone has a right to your new car. They can sell it to a new buyer to recoup their money. In addition, they usually charge something, like an interest rate, to account for their risk in letting you borrow the money.

Most consumers don’t consider many assets outside of their cash, car and house. But as a small business owner, it is important that you recognize that your balance sheet may have other assets that can be used as collateral in addition to the most common ones.

  • Common Current Assets

    • Cash

    • Accounts Receivable

    • Inventory

    • Prepaid Expenses

  • Common Non-Current Assets

    • Equipment and Vehicles

    • Buildings

    • Land

    • Intangibles like Patents, Goodwill or Intellectual Property

    • Investments

Many lenders focus on a wider range of assets that just equipment or land. Specifically, in our business, we work with small businesses to utilize the current asset of Accounts Receivable and quickly convert that asset to working capital cash.

In this case, you are owed money from your customers, but can’t access it easily. You are at the mercy of their Accounts Payable department for when you will receive your money due. For small, quickly growing companies, this wait time can mean they are missing supplier payments and payroll. This is where we come in, quickly converting invoices into available funds.

If you’d like to learn more about how that works and how it may help your business, please contact us!

Liz WhittenComment