This document discusses collateral requirements for loans, including SBA loans. It notes that collateral is not always required by lenders, and strong business plans and financial projections can reduce collateral needs. The amount of collateral required depends on factors like the risk of the loan and how much risk the lender already has. For SBA loans, personal guarantees are usually required from owners of 20% or more of the business. Which assets can be pledged as collateral varies by lender and loan type. Receivables can be factored for immediate cash flow. The value assigned to collateral depends on factors like the age of receivables. Franchises listed on the Franchise Registry may have more favorable collateral requirements from lenders.

1. O r a n g e C o u n t y SCORE® Quick Start Financing (4) Collateral Evaluation Startups & Franchise Considerations January 19, 2010

2. Presentation By John P. Lafare Management Counselor SCORE – Orange County Chapter

3. How do I get a loan? Prepared by John Lafare

4. Alternatively, the five “C”s

5. Is collateral always required? Requirements vary by lender, type of loan Some programs do not require collateral Higher risk means more collateral Strong business plans and solid financial projections can reduce collateral needs Borrower needs to provide reasonable reassurance of repayment from earnings Collateral not a substitute for repayment ability

6. What are the lender’s collateral requirements? Often the last hurdle to clear If no collateral, may need a co-signer with collateral to pledge Any asset of value can be pledged Up to or above 100% of loan principal amount Actual percentage a function of: Risk on your loan Accumulation of institutional risk

7. What are the SBA requirements?

8. What are the SBA personal guarantee expectations? For all SBA loans, personal guarantees are required for: Every owner of 20% or more of the business Other individuals in key management positions Whether a guarantee will be secured by personal assets is based on: The value of the assets already pledged The value of the assets personally owned relative to the amount borrowed

9. When is an owner-occupied residence required as collateral?

10. Which assets can be pledged?

11. Factoring of receivables Can be used to convert credit sales for immediate cash flow Outright sale of receivables to a factor: Receivables sold at a discount to book value May charge interest on the balance until collected Often withhold some money to establish a reserve fund Value assigned to receivables: Depends on the age of the receivables Older than 90 days typically not financed

12. How are collateral assets valued?

13. Collateral valuation examples

14. Who is lending?(Source: FY10 SBA Rankings Through 12/09) SBA loans by top 10 lenders up 105% YOY

15. Challenges for start-up businesses

16. Franchises and collateral Systems listed in The Franchise Registry: Eligible for expedited loan processing Control provisions acceptable to SBA / lenders For those not on the list, collateralization may be limited by franchisor requirements Lenders also prefer franchisees who are buying rather than leasing a store and land Currently, banks may not only require more collateral but may also reduce valuations http://www.franchiseregistry.com/