When purchasing a new property for your business you most likely will have to take out a commercial real estate loan. This article will show you how collateral works and what you can use as collateral for your property.
There are a lot of things business owners have to take into consideration when applying for commercial real estate loan. One major issue some small business owners may run into is not having the assets to cover the costs of the loan itself. This is where collateral comes into the picture. Collateral is defined as an asset or assets that are pledged to a lender in the event that you cannot pay your loan back. This is a good thing because it forces you to loan against your assets. The amount of money you receive is calculated on a loan to value formula. The higher the value of your assets to more you could potentially be loaned.
This, however, does not mean you can use just anything for your commercial real estate loan
There are many different assets that you already have at your disposal that you may not even know you have. Collateral is broken up into two different categories, real and paper. Real assets you can use for your commercial real estate loan include cars, watercraft and homes. Most banks, however, do not usually accept vacant plots of land as a form of collateral.
Many large corporations will often use other properties to finance the collateral when applying for a commercial real estate loan. You can also use the equipment that your business has, as well. For example, if you have a logging company and you want to take out a loan for an office to run your operation out of you can use your trucks as collateral. You do have to make sure that the equipment that you are going to use as collateral has a new or long working life.
For business owners that do not have or do not feel comfortable using their real property, you are able to use paper assets. These assets are things that are intangible. Things that fall into this category include stocks, chattel paper, investment funding and payment rights. When it comes to using your company’s stocks you have to be careful of the market. Say your company hits a few roadblocks and your stock drops. The lender could potentially go head and sell off the assets you have pledged.
You are even able you to use the revenue of your company, as well. This type of collateral is based on the projection of your business over a set period of time. Depending on the bank that is planning on loaning you the money you could have a weekly, monthly, quarterly or even annually revenue payment plans.
Usually, if you are applying for a hard money loan this is a great option for your business. Since the loan itself does not last that long, depending on your business’ income you could repay the loan quickly. Before you look into using some of your assets as collateral you definitely want to make sure you look at the all the ins and outs of the plan you choose.
Level 4 Funding LLC
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701
About the author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true.
Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.