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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.

Points Paid on a Loan – How to pay with Points or Interest

Most lenders when pricing a Real Estate Loan and sometimes with any loan that they price, charge the borrower a percent of the loan as a loan fee. This is very common when you are looking a Commercial Loan for Investor Real Estate or for any commercial purpose. Sometimes this fee can be tied to risk. This percent fee amount would depend on the perceived risk of the lender.

The Point or Points would be one percent of the loan for every point. So for a $100,000 loan, the point (if the lender was charging one point), would be 1% or $1,000. This amount may be hard to come up with, especially if the points are higher like at 2% or 3%.

One way to make the loan without any points is to have the lender raise the interest on the loan by one third of a percent (1/3% or 0.33%). Let’s look at the $100,000 Loan at 6% for 20 years. If we increase the interest rate to 6.33% then the lender will recoup his $1,000 in roughly four years and every year after the four is extra income to the bank. Of course the bank will usually only fix the rate for three to five years so it works well with a bank to get their points in interest over the loan. This can be sweetened by increasing the loan by one half percent and the bank will recoup their money in two years with another $1,000 made in the next two years.

Sometimes banks are inflexible but this can be used with banks that are looking at the return on the investment and not the cash up front on an investment or loan.

Note: Sometimes the Loan Officer is rewarded for how much money he or she brings into the bank in fees. These fees are usually worth more to the bank if they are generated now rather than later.

Note 2: The time for the bank to recoup the interest rate on a 10 year loan (amortized for 10 years) will be about 5 years to recoup the 1% point by increasing the interest rate by 1/3% or 0.33%.
 
Note 3: The bank can just increase the loan for the points and take out their points at closing. The loan would be for $101,000 and the bank would give the borrower $100,000 and the bank would take out for itself the $1,000 in points. This is how most small banks do it.

Remember to also check my website at www.schlueterfinancial.com for other info.

    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.


    

The SBA 504 Program Loan is the best loan for a business that is not renting the assets that are being purchased. The loan is for owner occupied (real estate) or owner used (equipment). The SBA 504 Loan is for Fixed Assets Only – meaning Real Estate, Equipment, Furniture & Fixtures. The SBA 504 Loan can be used for start-up business but was originally intended for existing business (business open for two years or more)

    Loan Guarantees are very common on commercial loans that are provided by banks or financial institutions. A Guarantee is a pledge by a borrower to pay the loan of another entity, (company, Corporation, LLC, Individual), when that entity is delinquent (does not pay payments), on the loan payments. Guarantees are a necessary evil in the application of a business loan in a name other than your own name. 

    The bank or financial institution will ask (insist) on your Personal Guarantee if you are not on the Loan Note. The bank will also insist on your spouse signing a personal guarantee also. They will say she has a marital interest in your assets. Federal Regulation B states that Marital Status cannot be used as a reason to sign a personal guarantee. This is true if your personal financial includes only your assets. Meaning that any assets or liabilities that are jointly owned have to be divided out on the personal financial statement. I have seen several instances where the individual stated, only their assets and liabilities, on their personal financial statement and the bank could not make to spouse sign a personal guarantee. Sometime stating Regulation B is needed to enforce the issue. You may also have the spouse sign a Marital Waiver which states that the spouse has no interest in the Assets. This sometimes if fine for Rental Real Estate but usually the bank or financial institution wants the spouse to make payments if the entity on the note does not make those payments and the bank or financial institution does not care if they have a financial interest or not. 

    The Small Business Administration – SBA will not only insist on the spousal guarantee but they will also secure that guarantee with the Borrowers home. The bank will also ask for the lien on the home but separate from the guarantee.  

    The Guarantee is very common and the only business that are not asked for a personal guarantee, or get it waived, are larger companies that have a very large net worth. Debt to Worth of at least one to one or lower than one to one. It is rare for a small business to get the guarantee waived but it would be a very noble and worthwhile goal of any business when pursuing a business loan.

    Please Email me if you have any questions or need any help with a loan application or loan renewal at roger@schlueterfinancial.com  or my website at www.schlueterfinancial.com .

    The Credit Report is a wondrous and potentially dangerous document. The bank or financial institution will run a credit report on every new request for a loan. They will do this for two reasons, one – they will want to screen out (turn down) any unwanted loan applications, and two – they will want to know if you have an adequate credit score that the banker and his bank can live with. When I say banker I mean the individual banker, who represents the Loan Committee of the bank, the bank Board of Directors, and the Regulators of the bank in that order.
 
    A good credit score is a moving target in the long term but you can say that if you have a score of over 700 then you have a good credit score. An adequate credit score before 2008 was a score of 630 or more. This has changed since the Great Credit Meltdown of 2008/2009 and now we are looking at a score of 680 or above to be adequate. Smaller banks usually look at the total picture when incorporating the credit score into the decision to make, or not to make, a loan. The large banks may use a minimum and not make any loans if the borrower has a credit score below a certain level. 

    Information on the credit report is individual in nature and is listed for you alone unless you own accounts with another individual and then you will be impacted by the joint payment record. I have seen people with good credit payments and not so good credit scores, and conversely I have seen people with bad credit payment and a pretty good score. The score is a proprietary number that take in consideration a large number of factors in order to come up with a final score. One item that people forget about is whether they have used most of their credit because this can adversely impact their credit. The credit reporting agency likes them to have room in their accounts and not to be fully drawn on their credit accounts. 

    The banker looks at NO CREDIT SCORE OR NO CREDIT REPORTING as being worse than no credit at all. This seems ridicules but they feel that if the person has had no credit in the past, then they do not know if they will pay their bills or not. 

    The banker can forgive certain Accounts with a bad credit record. They banker has in the past looked past items of health debt that had a bad record of payment because health is beyond control of the borrower and the insurance companies usually do not pay on a timely basis. Another item that banker have overlooked is Cell Phone Bills, because the cell phone companies have been notorious for not telling the borrower all of the details of a plan that can come back to haunt the borrower. 

    RUN YOUR OWN CREDIT AND PAY FOR THE SCORE. this is a absolute necessity because you need to know what your score is and you need to know what is on your credit report. You may find information that is inadequate or information that can be explained to the banker and subsequently overlooked by the bank. A banker will look more favorably on a borrower who can explain a bad payment than a borrower who has the Deer in the Headlights Look, when asked about the item on his credit report.

    Please Email me if you have any questions on Loan Applications or Questions on any loan related item at roger@schlueterfinancial.com or at my website at www.schlueterfinancial.com

    Banks are a necessary evil. They are in business to make money by lending money to business and individuals. They are also in charge of protecting the bank from losses due to the loans that they make. Sometimes these two activities are in conflict with one another and when they are the banker  will always protect the bank. The small business needs to remember this because his existence depends on remembering it. Banks are also regulated and sometimes the regulators can be more terrifying to the banker than the banker is to the borrower. 

    This said, all small and large business need to go to banks for their short and long term financing needs. The small business cannot go to the Market and issue stock to be listed on the exchanges like the Microsofts and General Electric’s of the world. The small business must remember that no matter how well he or she is treated they are an asset and thus can be valued or discarded at will by the bank or financial institution. 

    The bank will initially want to see the financial parts of any business plan first. This means that you need to have your Personal Financial Statement up to date and properly filled out with a signature and date. Have a History of the Company – Description of the business and need for the loan, along with a Source and Use of Proceeds for the money needed. The bank will need to see Financials and/or Projected Financials of the business with a future Cash Flow Statement showing you can pay for the loan over time. 

    Next the Bank will go over these Financials and proceed to run your personal credit. Only after he does this will he or she actually look at any Marketing or Product materials that you have worked so hard on. The old saying is partially true: If you have money the bank will lend you money, If you do not have money the bank will be reluctant to lend to your business. The key here is to give the banker what he or she wants on the first visit so they will not loose interest in you or your project. Go over the previously mentioned documents before the bank sees them to work out and problems or to think of any answers to questions that will come up because of the financial information or the credit report. 
    
    I guarantee you that you will have the Loan Battle half won if you adhere to the above recommendations and have you information inspected by someone who will be able to improve it or to find flaws in the information before you get before the banker. remember the banker is your friend but he is friendlier to his board of directors, his regulators and his projected profits to the bank.

    You can get help with any business loan application or question on any loan situation by Emailing roger@schlueterfinancial.com or going to my website at www.schlueterfinancial.com 
  

    The SBA 7a Loan is the most used of the SBA Loan Programs. The SBA 7a Loan Program does not loan any money. The 7a Loan Program Guarantees the loan made by a Bank. The percentage of Guarantee is 85% on loans $150,000 or less and 75% on loans over $150,000. This percentage is at any point in time, meaning the bank will always have an exposure of 25% to 15% on the balance of the loan at any point in time during the loan repayment. 

    Loan size has been expanded from $2 million to $5 million. The maximum goes to $5.5 Million if the borrower is a manufacturer or meeting Green Renovations. The alternate size standard can be used which will usually be more generous than in the past. The Size Standard is Companies with a Net Worth of $15 million or less, and Companies with a Average two year Net Income of $5 Million or less. 

    Terms for the SBA 7a Loans are Inventory and Working Capital  can make loans of up to 10 years. Equipment, Fixtures and Furniture the term is 10 years or the Useful Life of the Assets. Real Estate has a maximum term of up to 25 years. 

    Rates for the SBA 7a Loans are Prime + 2.25% for loans greater than $50,000 with a term of less than seven years. For terms of greater than seven years and loans greater than $50,000 the rate is Prime + 2.75%, (rates can be higher for loans of less than $50,000). 

    There are two Fees on SBA 7a Loans. The first is a Guarantee Fee which is paid by the borrower but can be included or amortized into the loan amount. This fee is 2% for loans of less than $150,000, 3% for loans of $150,001 to $700,000, and 3.5% for loans over $700,000. The Guarantee fee is one quarter of a point for loans of 12 months or less. The second fee is the Lenders Ongoing Servicing Fee and this is usually included in the rate to the borrower within the maximum that can be charged. The fee is set annually but is usually about a Half a Point Annually. 

    This has been a good overview of the SBA 7a Loan Program but their are many rules and regulations that depend on the specifics of the Proposed Loan. Please Email me if I may be of service to you at roger@schlueterfinancial.com  or at my website at www.schlueterfinancial.com .

    This entry is concerning the Approach to your Bank for a Loan, even if you are looking at an SBA Loan. Always start out asking the Bank for a Conventional Loan ( a regular Real Estate, Equipment, Inventory, or Working Capital Loan). The Bank should be the one to decide on a SBA Loan requirement for your loan. The SBA does not loan money itself anymore. It did loan money at one time but now the SBA only guarantees the loans that it is involved with, (an exception is the SBA 504 Loan which is for Fixed Assets Only – Real Estate, Equipment – useful life of 10 years, and related Furniture Fixtures, Installation of Equipment and costs associated with the Real Estate Purchase and the SBA only lends up to 40%). Usually the SBA Guarantees the Bank Loan up to a certain amount. This can be 75% up to 90%, (90% only under certain conditions),of the bank loan at any time during the loan. The Bank calls the shots and has to want to make the loan under  the SBA conditions and requirements.
 
    The bank may bring up the need for the SBA Loan and inform you that this SBA Guarantee is the only way the bank will make a loan to you. Usually there is a reason like: not enough collateral for the loan, down payment too low, the asset to be bought with the loan is risky in its resaleability, you are a new business, your business had a bad year, your credit is not high enough for the bank, etc. Sometimes the bank will just decline the loan. You need to present the loan as a straight bank loan but let the banker know that you would like to know if there is any other ways to make the loan. 

    Always look at several lenders. Some banks do not lend in certain Industries like Restaurants, Recreation, etc. Some banks do not like to make loans with a SBA Guarantee. Some banks may have internal problems that exclude it from making loans of certain types by their regulators. Always look at several Lenders!