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Collateral
Collateral can consist of assets which are both usable in business and personal assets which remain outside business. Borrowers can assume that all assets financed with borrowed funds will collateralize the loan. Depending upon how much equity was contributed toward the acquisition of these assets, the lender is also likely to require other business assets as collateral.
For all most loans, personal guarantees are required of every owner of 20% or greater, plus other individuals who hold key management positions. Whether or not a guarantee will be secured by personal assets is based on the value of assets already pledged and the value of those assets personally owned compared to the amount borrowed. In the event real estate is used as collateral, borrowers should be aware that banks and other regulated lenders are now required by law to obtain third-party valuation on real estate-related transactions of $50,000 or more.
Note: Certified appraisals are required for loans of $100,000 or more.
Owner-occupied residences generally become collateral when:
The lender requires the residence as collateral
The equity in the residence is substantial and other credit factors are weak
Such collateral is necessary to assure that the principal(s) remain committed to the success of the venture for which the loan is being made
The applicant operates the business out of the residence or other buildings located on the same parcel of land.
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