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How to Prepare your Business for a Bank Loan (2)

Last week on this topic we introduced the element of security which most people call collateral for loan and we mentioned specifically, direct security which the borrower deposits with the lender (bank) to secure his loan.

Here we shall be focusing on how to prepare security for the purpose of bank loan. But before we go straight into that lets recap on what security is all about.

Ordinarily, and by prudential lending norms every lending proposition should stand by itself. By this the bank would want to ensure that the loan is good or ‘secured’ in itself without security. This means the business the loan is supposed to finance should be able to repay according to plan.

However, the bank still asks for suitable security from the borrower in case the loan should go bad, either, beyond all the business plans calculated circumstances.

Bank
Bank

In this connection it is clear that security is required as a safety net, that is, something the bank falls back upon should the borrower find himself unable to repay the loan due to unforeseen circumstance.

Invariably, for the bank the security is never seen as the source of repayment, but only as something to fall back on if the expected source of repayment fails, something like insurance against unforeseen adverse developments not captured in the loan assessment.

Though many banks believe they can lend based principally on cash flow of the business, both prudence and regulatory requirements compel a healthy security to meet the requirements of a secured lending. Hence any prospective borrower should better prepare what I call a bankable security if he wishes to get loan from any bank. And how do you do that?

To prepare a bankable security some key requirements are as follows:

VALUATION STANDARD: the security should be easy to value, and usually it is based on market price/ value. As you prepare to apply for a loan you expected to find out the current market value of whatever you are required to present as security. Note also that the bank would place a discount on the market value.

LEGAL OWNERSHIP: Ownership should easily be established, the security should be easy for the bank to obtain a good legal title, ownership. Your ownership of the security should be foul-proof while the bank would usually confirm that transfer of ownership to itself in the event of loan default could be done legally and easily.

CASHABILITY: The security should be readily marketable or realizable, that is to say the bank should be able to easily convert the security to cash.

DEPRECIATION/ APPRECIATION: It is expected that the security should appreciate in value otherwise its depreciation would be discounted against the loan amount outstanding.

 


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