Talking credit with Mike Strathman: Collateral
How do lenders secure their investment if you can't repay?
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The primary source of repayment on any credit product is the cash flow generated from your small business. The lenders, though, will look to the collateral as a secondary source of repayment.
What different types of collateral are there?
There's commercial real estate. There's vehicles, which would be cars and trucks, titled vehicles. There's a broad category for equipment.
Do you take equipment that is already owned by a business and equipment that they want to buy?
Generally speaking, for the smaller loans, we're going to secure the loan with the asset being purchased. Now as you get into larger credits, it is possible that the lender will take a security interest in both the asset that you're purchasing currently and your existing unencumbered assets or equipment.
You also have cash collateral as an option. How does that work?
Basically, you as a small business owner would pledge the cash you have either in your business or personal checking accounts, savings accounts, or certificates of deposit.
Why wouldn't a small business owner just spend the cash in their business as opposed to taking out a loan?
You, as a small business owner, absolutely could use the cash to purchase whatever you're purchasing. But I think it's a great vehicle to establish a positive credit history or re-establish new credit if you've had blemishes in the past.
Mike, is there a difference in applying for a loan that's unsecured versus secured?
When you put it in the context of the five Cs of credit, whether it's secured or unsecured, I still care about credit history, capital, capacity, and conditions. But as we move into the secured underwriting, there's going be a little more due diligence on the collateral that's being pledged, and what is its value, how liquid is it, things like that.