Loan problems
Assets that may concern your lender include outdated technologies. If your business is a manufacturing concern, a lender will realize that outdated equipment hurts competitiveness.
If you are an investor in a partnership with liability for future capital demands, the lender will discount your income or cash flow projections. Companies are notoriously illiquid. Plan to have your lender discount net asset value estimates.
Ask for enough money the first time. Don’t put yourself in a situation of having to come back for more money. For example, if you have potential exposure for a $200,000 capital call from an investment, don’t apply for a $100,000 line of credit because you don’t think the partnership might need more.
If everything else is acceptable (cash flow, stability, assets) and you have a $200,000 exposure, ask for $200,000. The lender will feel more comfortable knowing that you will have enough money to cover potential liabilities and not have to approve! another loan to protect the first!
If you own shares in a privately held company, it’s virtually unsaleable. Letterhead or “144 paper” cannot be easily sold. It won’t do your lender any good to foreclose on a bad loan that can’t be used to reduce your indebtedness. Expect a discounted value.
The valuation of personal businesses is a very complicated area. While your valuation may be perfectly legitimate for a going concern, it does not reflect what could be obtained if you no longer ran the business or if you sold it at a reduced price.
If something were to develop that hurt your business such that it could no longer generate enough cash flow to pay off the loan, then it wouldn’t be as valuable anymore! About the only thing a lender could sell would be actual tangible assets, which would be used and depreciated.
While not a problem, certain prepaid assets have little collateral value to a lender because they wouldn’t be worth much in liquidation. For example, if you prepay rent or insurance premiums to get a discount, that’s an asset to your business. However, it interests a lender only because it affects your cash flow, not as collateral. Deposits you’ve paid for things such as equipment leasing, rent, or utilities also have negligible value.
Troubled Personal Assets
On a personal loan application, there will be a line to estimate the value of your household assets. While your furniture may seem valuable to you for many reasons, a lender will value it at about 10 cents on the dollar of the purchase price.
Attach a note to your financial statements indicating that works of art or other collectibles are listed at retail price. If you have current appraisals, include them. If not, note how you arrived at the value (eg, challenged local art gallery).
The lender will consider artwork and collectibles at wholesale value, or approximately 50 cents on the dollar. That’s why a lender could sell it quickly.
1 Assets that present liquidation problems for your lender will be heavily discounted by the lender.
2 Farm properties, partnerships, non-income real estate, and shares in closely held companies are prime examples of troubled assets.