Here is what the dictionary says is considered collateral… First … you and your bank are going to greatly differ on the value of your collateral. Would you like to know why? Take a look below and see in your opinion what you think would be called “good” collateral if you were doing the lending. By definition you can see that many of your assets would be considered collateral.
1.Secondary, subordinate, or supplementary item accompanying a primary item.
2.Specific asset (such as land or building) pledged as a secondary (and subordinate) security by a borrower or guarantor. The principal security is usually the borrower’s personal guaranty, or the cash flow of a business. Except for highly creditworthy customers (who can get loans against only their signatures) lenders always demand a collateral if the primary security is not considered to be reliable or sufficient enough to recover the loan in case of a default.
Think like the bank for just one minute (I know that this is painful but just try). What are the best kind of assts… MONEY, TREASURIES its fast and easy to convert and you always know that you can use it to repay any amount.
Next are assets which are easily convertible to cash but the amounts are variable..
Gold, Silver, precious metals, stocks you can liquidate it pretty quickly (if you have the correct documents) but the price is very variable (so you can only guess what you can get out of it on any given day) so you will discount more than pure liquid but less than the harder (slower) assets.
So the harder the asset is to liquidate the lower the value. As a creditor your not trying to get the most of the asset (as you would be) your trying to perfect the loan and get it paid off. So as a note holder you may sell that boat for 25% of it’s value your not concerned with getting the most only getting the note paid off.
Special cars, trucks, motor homes, toys are all very heavily discounted for collateral. If you were a lender would you want another car or boat or ??? you would need to sell.
So you look for
1. Is it liquid (can I turn it to cash immediately) remember accounts receivable are NOT cashed immediately so expect a hair cut on the value.
2. What can be converted to cash in 30 days or less? You might say inventory but that is a possibility if you have an orderly liquidation vs a non orderly liquidation or auction. As you can see you will have different values based on the length and method of liquidation.
3. Are very slow assets …. real estate, intellectual property, goodwill, patents, etc These are really slow and although have value it’s questionable just how much the fair market value will bring at the time of liquidation. Heavy discounts will apply to most of these assets
So what do you think now about your collateral? What did you feel would be the value of your assets.