In the world of commercial loans, collateral refers to assets that serve as a guarantee to a lender in the instance that you cannot pay back your loan. In this case, the lender has the rights to obtain ownership of said collateral, whether it is a building, your company’s equipment or machinery or even your own car or house. While this sounds scary, collateral can put your loan amount into perspective, so you only loan against your assets. In this case, your commercial real estate financing will be calculated on a loan to value ratio, and the greater the value or your collateral, the higher loan amount you can borrow, in theory.
These assets are defined a certain way, so you can’t use certain things as collateral against your loan. There are also items of value you have that you may not even have considered as collateral. Typically collateral can be split into two categories – real and paper. “Real” assets refer to cars and homes, as mentioned above, but also watercraft and other vehicles. While buildings can serve as collateral, banks and lenders typically won’t consider plots of land.
The other category is “Paper” collateral, which includes stocks, bonds, investment funding and payment rights. When it comes to company stocks, take into account the current state of the market because if your stock drops, your lender has the right to sell off the assets that you used as collateral. You can also use your business’s revenue as collateral, however you will have to have a solid projection of your company’s business earnings over a set timeframe. Payment plans could be required from the lender for your commercial real estate financing loan in increments of monthly, quarterly, or even annually.
When it comes to securing a loan, it all comes down to one basic thing — lenders need to know that you will be able to pay back the loan or that they will get something of value (aka your collateral) if you are not able to repay the loan. Ultimately, they can’t risk losing the money they lend you.
Securing commercial real estate financing with collateral is a great way to get the loan you need for your growing business. As long as you intend to repay the loan within the specified terms agreed upon between you and the lender, there is no reason to fear putting up collateral when you need a loan. So when you are shopping for a loan, make sure to let your lender know what kind of collateral you have to back up your loan.
Level 4 Funding LLC Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com 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.