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Home >> Lending >> Business Credit
Collateral for Business Loan, Not Co-Signer
I spoke with a loan officer at a local bank today just to see what I would need besides a good business plan to qualify for a small business loan with a start-up business. I have not actually brought them anything to be considered yet. The amount I will be asking for is going to be $45k, which is a relatively small amount; I am putting a good bit of my own money into the business.
Without knowing my credit score etc., the woman told me that I would most likely need a co-signer to guarantee the business loan. I had told her I would be putting up a piece of land I own as collateral and a vehicle if needed. I am not sure why I would need a co-signer when I am going to put up the piece of land as collateral. She said the collateral will help when the loan is brought to the loan committee, but they will still probably want a co-signer. She completely lost me with this statement. I thought my land would be the guarantee the loan would be repaid and if not I would lose it.
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 In today's real estate environment where we see depreciating values, having dirt to rely on is no guarantee at all. We can only assume the lender often wants another party available to make payments if necessary. No lender wants to repossess or foreclose and have to sell property of any type to pay the loan. That takes a lot of effort and can be a slow process. What the lender wants is cash in, for the cash out they gave you.
While $45,000 may seem to be a small amount to you, the lender has to do the same work to get the loan approved, serviced every month and paid off. If the loan didn't perform, they have to explain that as well. We didn't like explaining why a $5,000 was past due any more than a $50,000 when our lending reputation was on the line, so we would get covered as many ways up front as possible to ensure payment.
It could be that once your business plan is reviewed, along with your investment, your experience and your collateral, a cosigner wouldn't be necessary. It could also be that based on your borrowing entity, a partner/cosigner would absolutely be required. Speak to a lender and tell him or her what you have to offer. If the lender wants more than you're prepared to offer, go elsewhere. Lenders have their limits and you'll have yours. If they meet, you'll have a relationship.
Published on BankingQuestions.com 8/28/08
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