Many private investors or alternative lenders will issue financing without any security or collateral, justified through risk mitigation of higher interest rates. However, collateral is not ruled out altogether in alternative financing. On the contrary, many alternative financing options include collateral to strengthen the deal and increase the loan amount. Real estate backed loans are among the greatest in volume and figures, having real estate to use as collateral has many advantages and its own set of limitations.
In order for property or for real estate to qualify for secured funding, there must be a substantial amount of equity available. Usually, private business lenders look for a minimum of 20-30% (70-80% Loan-to-Value or LTV) equity available in a property in order to qualify as collateral. If the borrower doesn’t live up to his end of the loan agreement, then the lender can take steps to acquire the property or use it as a bargaining tool to collect the outstanding payments. Among many benefits, real estate loans bare lower interest rates.
StrongBusinessCredit is witness to both good and bad real estate transactions. Most shortcomings are the result of poor presentation, unprepared financials and/or absence of an execution strategy (covered in the business plan). Our clients are asked to revisit projections and business planning. Some minor yet effective tools include a Power Point presentation, demographic study of the surrounding properties, brochure outlining the highlights and—a business plan.