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Thursday, May 1, 2008

Today's Observation - Loan Collateral

One of the reasons that I created this blog was to share experiences in the finance area that we can all learn from. Today I want to share with you a fact of our economic environment as it is effecting SBA and other collateralized loan programs.

The banks are now requiring not requesting for almost 90% coverage of collateral for an unsecured (meaning no real estate) loan. Usually this would not be an issue as most clients would have equity in their primary residence or other properties. But what is happening today due to the amount of foreclosures, and short sales,perceived equity is not being accounted for by the bank appraisers. Instead they are using the foreclosure and the short sale as comps which is hurting the deals that are approved subject to the appraisals.

Usually when we think of the appraisals that the bank are doing we think of the subject property, not the collateral. Now we have to think about both, the collateral property and the property they are buying.

Now I'm not saying that all deals for real estate are requesting more collateral, but when you add a bit of debt refinance and the request of working capital the loan request is greater then the value of the subject piece of real estate.

So in conclusion make sure that your clients really understand the role of collateral, and that they really must have an extraordinary amount of equity to pledge.

For further information on commercial loans and SBA visit our website at http://www.loanforbiz.com.

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