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Friday, March 23, 2018

Ben Barbanel assets
Opinion > OakNorth

Keeping up with the collateral: understanding the assets in your business

Ben Barbanel, head of debt finance at OakNorth | 7:27 Wednesday 20th September 2017

Whether you’re a start-up, scale-up or a limited liability corporation, you’re going to need capital to grow, so understanding the assets in your business – and, therefore, what security a bank will use to support a loan – is key.

If you’ve ever applied for a business loan, you’ll know the favoured form of collateral is real estate, but in this age of falling home ownership, increased co-working facilities and new industries where physical offices aren’t required, this model is no longer fit for purpose. It is for this reason that we work with businesses to understand what other assets they may be able to use if real estate isn’t available. These may include:

• Debtors – Some banks will approve a business loan based on the value of the invoices a company has raised. For example, let’s say your business wins a significant account or secures a substantial order, but you don’t have the resources to meet the needs of the client without bringing on additional staff, equipment or raw materials – all which cost money. In a case such as this, a lender may consider letting you use that order (essentially future revenues) as collateral to secure the loan.

• Plant and machinery – Lenders may also consider the equipment and machinery you use within your business. This could be as part of a manufacturing process or production line or, in some cases, cars, lorries and other vehicles.

• Stock – Many businesses – especially those operating in sectors such as manufacturing or retail – will have a large proportion of the value of their businesses tied up in stock. By securing finance against the stock they hold, businesses can release the cash tied up in these assets and use it as collateral.

• Intellectual property – If businesses are willing to pledge their copyrighted works, trademarks and/or patents, the value of their collateral pool will increase, along with their chance of securing a loan. IP-backed transactions are becoming increasingly popular as the increased cash flow from the licensing of the IP can be substantial.

In addition to understanding the assets in your business, it’s also important to understand the value of these assets. One of the most common mistakes business owners make when it comes to collateral is thinking that it’s worth a lot more (or a lot less) than it is. If you’re not sure what your assets are worth, consult with an independent appraiser to get a better idea of how the bank will value them.

Essentially, no matter what type of collateral you have or how much it’s worth, the most important factor to consider is the strength of your business and its future growth prospects. Every loan we write at OakNorth is driven by the customer’s ability to repay it, which starts and ends with a healthy cash flow forecast. If cash flow is strong, we can look to support businesses on an unsecured basis if required, so it’s vital that you understand your business finances and can outline how they may change with any additional capital.

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