Bank Collateral
Article by Roger Schlueter, MBA
Banks have some of the same rules regarding collateral and one rule is that, There is no such thing as too much collateral. Most of the rules of minimum amounts of collateral are listed under the banks Loan Policy.
There are no absolute rules but the usual way the bank looks at Assets and their collateral value is as follows:
1) Real Estate – Most banks feel comfortable lending up to 80% of the Real Estates Value. Some banks will lend up to 85%, and 90% to 100% with an SBA Guarantee on the loan but the SBA usually wants at least 10% put into the deal as equity by the borrower. Since 2008 many bank want up to 30% equity in real estate purchases, especially if you are buying Commercial Real Estate. That means that they will lend up to 70%.
2) Equipment including automobiles will usually command 80% or less. If the products are new and being purchased, then a bank may lend 100% but this will be equipment that is being purchased new. The used equipment will only be worth what the bank feels it is worth unless an appraisal is performed on the assets. The value of the equipment is a matter of subjectivity and the bank will only lend a percentage of the value up to the perceived amount.
3) Accounts Receivable – Banks will usually lend up to 70% to 80% of the eligible Accounts Receivable. Eligible Accounts Receivable are Accounts that are not over 90 days past due. This number is a rule of thumb and can be 30 days or 60 days.
4) Inventory – Banks look at the perceived value of the inventory. Usually 50% or less of the value, but it really depends on the banks value of the inventory. Example of this would be if you sold Retail Goods then the bank could go to distributors and find a value of the goods and this would have a bearing on the value they would lend against. The more value that the inventory retains the higher percent the bank would lend on the inventory.
5) Customer Lists Etc. – Banks would look upon this asset as one with no value.
6) Stocks – most banks only lend on stocks listed on a major market like the NYSE or NASD. They lend up to 70 to 80% of the value of the stock on an ongoing basis. This means that if you have a stock that is valued at $50 a Share and you have 100 shares then the value is $5,000. They will lend 80% of that value or $4,000. The problem comes when the stock value drops to $30 a share then the value is $3,000 and the maximum value that can be borrowed is $2,400. If you had borrowed $4,000 then you would have to pay the loan down to the $2,400 value. This would mean you would have to pay the loan down by $1,600 immediately .
The real trick to remember is that banks want as much collateral that they can get and also remember that a bank will rarely release collateral until the loan is paid off.
Please visit my website at www.schlueterfinancial.com for more lending information.