The one thing you want to remember if you ever borrow money from a Bank for a Commercial Loan – Banks Do Not Risk Their Money On Your Loan, Period. Banks are always acused of lending money to people who have money and not lending money to people who do not have money. Their is a lot of truth to that idea. That is why, I’m sure you have heard people say the bank would make the loan but it wanted twice to three times the collateral to make the loan. Again, Banks Do Not Risk Their Money On Any Loan.
Banks look for two ways to get the loan paid off. They look to you the borrower to make monthly payments of Principle and Interest until the loan is paid in full. This is the first way the bank gets out of a loan. The Second way out of a loan is that the Banker takes possession of the Collateral (anything of value, from cash to equipment to vehicals to real estate) and the Bank sells the Collateral to pay off the loan. The funny thing is that after the Bank gets possession of the Assets (Collateral) the value that someone will pay the bank for the Real Estate, Car, Equipment or furniture, usually goes way down from what the Asset was originally valued. Most people expect the Bank to sell the Asset very cheaply – human nature, I guess. That is why the bank puts a very high value on Cash. The value is less but still high for Bonds and Stocks but goes really low for Equipment and Furniture and Fixtures. Real Estate can hold it’s value but not in the downturn of 2008-2009.
Example # 1
A person started an Imprint Business. They imprinted T-Shirts, Coffee Cups, Golf Balls etc. They originally paid $96,000 of all of the equipment and supplies to go into business and they bought into a franchise which is less risky than many other business forms.
They went out of business after the first three years and could not make their payments to the Bank. The bank sold their equipment and supplies to another business for $15,000. The loan principle was $75,557 which leaves a $60,557 shortfall. This is why the bank asks for additional collateral for almost any loan. The bank actually had a home with some equity and an SBA Guarantee of 80% (this guarantee is 80% of the loss after liquidation of all assets). The Bank actually lost approximately $10,000.
Example # 2
Three persons bought an investment business property for $1,700,000 and the property was appraised for $1,900,000. They put 20% down and financed the remaining 80% or $1,360,000 with the bank. Durring their first year they did some reovations in the office and they seemed to by making the business work. The first year was approximately 6 months and they seemed to do alright but in the last quarter of the second year they could not make their payments. The business downturn of 2008-2009 had hurt their sales. They turned the property over to the bank. The bank ended up selling the property for much less than they thought it was worth. They ended up selling the property for approximately $1,060,000 and lost $300,000 on the deal.
Conclusion
Banks do not like to loose money on any Business Loan. They will go to great lengths to get the money back for their stockholders – they do not risk money. Most banks will try to get money from any Guarantees that were pledged on the Loan and will sue the owners and guarantors to get their money back. There are many people that think banks should risk money to a business that is starting a business. Banks will get enough down payment and/or collateral on a business loan to assure that the loan will get paid back by the first way out or the second way out. Banks Do Not Risk Money on Business Loans, Period.