Financing - Collateral requirement question

March 03, 2024

by a searcher from University of Maryland Baltimore County in Los Angeles, CA, USA

I have a very basic question. Any help will be greatly appreciated.

I am planning to purchase a 1.5MM business (Manufacturing industry). As I speak with banks, I have found out that they are typically requiring about 15-30% down payment (rather than 10% which we see online) and also they require collateral (about 1 to 1.5X of the loan amount). The bank told me that collateral requirement is typical for someone like me who is a first time buyer of a small business.

I can potentially self fund about 15% of down payment but the collateral requirement is something that I just wont be able to do if I want to self fund.

Would love some guidance in terms of how I should think about it. Have anyone had experience with this? Does this mean that I need to expand by financial options beyond traditional banks?

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

Ammar, what type of structure are you looking at. If you are trying to do a conventional bank loan, then you are correct most lenders will want to be fully secured by hard business assets and are likely to require a significant down payment. If you are looking to do an SBA 7A loan, then you should be able to get away with as little as 10% down. Now the SBA does require outside collateral if you have any, but even if you do not have sufficient collateral to fully support the loan, they would just take what you have and still do the loan. We do loans all of the time with heavy goodwill value, even when pretty much the whole purchase price is backed by goodwill value. If you do not have outside assets to pledge (which is most often taken in the form of a second or third mortgage on a residence of other wholly owned investment properties where you have 25% or more equity), they will still make the loan. I would be more than happy to discuss your options in more detail. You can reach me at any time at redacted Thank you and have a great day!

Reply by a professional
from University of Miami in New York, NY, USA

Ammar - in my experience, the lender takes the assets of the organization, including the assignment of runs and profits as collateral. I don’t believe it’s something that you have to put up separately.

What this means is, is that the value of the business has to be approximately 1.5X the loan amount. This would be calculated by the hard assets, and the value of the income stream.

Be happy to discuss this with you: redacted and###-###-#### .

+6 more replies.

Join the discussion