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Real Estate Financing
Many private investors or alternative lenders will issue financing without any security or collateral, since they minimize their risk through higher interest rates. However, there are cases when the strength of a deal can be increased when there is property or real estate used as collateral. Having real estate to use as collateral has many advantages, but there are some 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 'LTV') equity available in a property in order to qualify it for the purpose of collateral. One positive to this is that because the lender has some ownership of the property once the loan closes, the interest rate on the loan will usually be lower. 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.
Real estate isn't the only type of property that can be used as collateral for a loan, but is the most common. Other items can be used as collateral, and the amount of available equity required by the lender will vary, depending on the value of the property and the amount the borrower is looking for. With a strong business plan, solid financials, and a qualifying property, the likelihood of acquiring alternative business financing can me much greater than unsecured. |
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