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Financial Word of the Week (Small Business Month): Collateral

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FWOTW

Collateral is a company’s assets that are pledged to ensure payment of a financial obligation. Collateral can include business or personal assets such as equity in your home. Business collateral typically includes equipment, inventory, vehicles and accounts receivable. As we explained in our post about the “Five Cs of Credit” (one of which is collateral), you may be required to sign a guarantee with the promise to repay the loan if you cannot repay it with the profits from your business.

Sometimes a Small Business Administration (SBA) loan could be used if there is a collateral short fall within the organization.  An SBA loan has other requirements as well.

A company must understand that the collateral they put up for a loan could be seized if a company defaults on a loan. Also remember that most lending institutions require your collateral value to be more than the loan amount.

 

 

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UMB Financial Corporation (Nasdaq: UMBF) is a financial services holding company headquartered in Kansas City, Mo., offering complete banking, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska and Arizona. It also has a loan production office in Texas. Subsidiaries of the holding company include mutual fund and alternative investment services groups, single-purpose companies that deal with brokerage services and insurance, and a registered investment advisor that manages the company's proprietary mutual funds and investment advisory accounts for institutional customers.



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Financial Word of the Week: Secured Loan and Collateral

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FWOTW
What is a secured loan?

The word secured brings to mind images of armored trucks and locked vaults. Both can guard cash and valuables, but not a loan.

A secured loan is a loan in which the borrower pledges property (e.g. a car, house or other property) to the lender to act as a source of repayment if the borrower cannot pay back the loan.  The property that is pledged is called collateral.  If you do not make the payments as required on the loan, the lender may sell the collateral to cover the amount owed.  Usually a lender will require security for high dollar loans or when your credit is not good enough.

The opposite of a secured loan is an unsecured loan, which does not require collateral.  A lender may give you an unsecured loan when the borrower’s credit history is strong and the amount loaned is for lesser amounts.  Most credit cards are unsecured loans.

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So what does this mean for me?

Secured loans can help you make large purchases and pay them off over time. If everyone had to save for the full purchase price of a house, most people could not afford to be a homeowner until middle age, if ever. Because of the security provided by collateral, banks can provide lower cost credit options through secured loans. Your first step before borrowing should be to do a financial checkup (stay tuned for next week’s blog post to learn more about that) and figure out if you’re financially ready for that large purchase.

 

Statistics Source: New York Fed Household Credit Quarterly Report

When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.

 

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UMB Financial Corporation (Nasdaq: UMBF) is a financial services holding company headquartered in Kansas City, Mo., offering complete banking, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska and Arizona. It also has a loan production office in Texas. Subsidiaries of the holding company include mutual fund and alternative investment services groups, single-purpose companies that deal with brokerage services and insurance, and a registered investment advisor that manages the company's proprietary mutual funds and investment advisory accounts for institutional customers.



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The Five Cs of Credit

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Are you an entrepreneur looking to start up a new boutique or local restaurant? Or are you an owner of an established firm seeking to expand or upgrade? Either way, securing financing for your business is sometimes an overwhelming process.

UMB has a long history of being prudent in our lending. We don’t want to put our customers, or ourselves, at risk, so we follow a sound underwriting process to ensure we are making the best decision for everyone involved.

Here are some common guidelines we use when it comes to the loan process.

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Character

This is the overall impression you make on the banker. Business experience and educational background will be evaluated, along with references and past experience.

Word of Advice: You need a business plan. Be open and honest – you should provide the most accurate and objective information about the business and industry landscape.

Capacity

You will need to detail exactly how you plan to repay the loan. Business cash flow, repayment timing and likelihood of repayment will be considered, as will payment history on your current credit. Financial partners need to have confidence that your business will generate enough cash to operate and sustain the company.

Word of Advice: Prepare to have money set aside for a down payment.  Don’t come to the table empty-handed.

Capital

This is the money you have individually invested in the business and is used to assess your risk should the venture not succeed. It’s important for you to demonstrate a personal financial commitment before seeking third-party funding.

Word of Advice: Financial institutions generally require that at least one-third to one-half of the business be funded with your money.

Collateral

This is where assets you own are pledged to the lender as a secondary source of repayment in case the loan is not repaid. You also may be required to sign a guarantee with the promise to repay the loan if you cannot repay it with the profits from the business.

Word of Advice: Most banks will expect the collateral assessment to be greater than the loan amount.

Conditions

This is the outlined plan for the loan, with details on how it will be used and for what purposes. Current economic and business conditions for all industries, as well as your business’ specific industry, will also be evaluated.

Word of Advice: Have a strong knowledge of industry trends, both nationally and in the local market. Timing can be critical.

You should pick a financial lender that will be your partner, not just your bank. After that, securing a loan to start or grow a business should be a smooth process and you’ll be well on your way to fulfilling your dream!




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