When you get any business loan, the lender wants assurance that you will pay the loan back. There are several ways for a lender to protect itself, but two of the most common are for the lender to require collateral and a personal guarantee. A personal guarantee is a legal contract between a lender and business owners or other individuals to guarantee loan repayment. These guarantors agree that a lender has the right to pursue loan repayment directly from their personal net worth if the loan should go in default.
The first 4 Cs of Credit – character, capacity, capital, and collateral – all deal with a company's financial history or current state of affairs. One would think a clean past and current financial strength would make lenders eager to produce a 504 loan, or any business loan. However, lenders are also concerned with the future, and how the future economic outlook may affect your business.
Today's topic is collateral, one of the 5 Cs of Credit that lenders use to determine their level of risk when offering a 504 loan, or any business loan. You may be thinking, "I've checked my credit reports and made sure my character hasn't been damaged. My business has good cash flow (capacity), and I've got plenty of skin in the game (capital). What more could a lender want?" Lenders do want more; they want collateral.