A corporate financing without sufficient collateral? For many banks unthinkable. Anyone who needs a loan to finance investments must secure it. But which collateral for corporate financing is required? What matters to the collateral? And how do companies get financing, even if the collateral may not be enough?
What are collateral for corporate financing?
In addition to the future revenues (cash flows), which are determined by the banks on the basis of annual financial statements and the BWA, the equity (and the equity ratio) is decisive for the lending of financial service providers.
If the cash flow is right, collateral comes into play. These can be, for example, surety bonds via surety banks or directors’ guarantees from the shareholders of a company. But what exactly suits as security for corporate financing – and how is the value calculated?
How are collateral calculated for corporate financing?
When it comes to the value of collateral, financial institutions such as banks typically do not expect the market value (or market value) of the asset, but usually consider a buffer. In this way value fluctuations during the loan period should be compensated. In addition, there are recovery risks that banks include in the valuation of collateral for corporate financing. These discounts may sometimes be very high – depending on the security involved, the mortgage lending limit (the percentage of the value of the security to which banks lend the property) may vary.
For real estate, for example, the lending limit is usually between 60 to 80 percent of the value. The valuation of private real estate such as flats or houses is done internally at most institutions – ie by employees of the bank. For larger commercial real estate or apartment buildings as collateral, many banks additionally require the assessment and evaluation of impartial appraisers.
Commercial and private real estate
Often, mobile objects such as machines, vehicles, technical equipment or operating equipment are also used as collateral for corporate financing. In most cases, this requires a value of more than 10,000 euros, as well as general usability – this refers above all to special machines or custom-made products that would not be easily reusable for the financier. Vehicles such as cars and trucks are usually valued at around 50 percent of the current value as collateral. Similar values arise when transferring assets and machines as collateral. However, since this value varies very much with age, the value is usually reduced by 20 percent each year.
Operational equipment and facilities are even included as only 40 percent of the value as security. In general, however, it also applies to movables that all banks value collateral differently, these percentages are only intended to provide initial loose orientation.
Assets such as savings and bank balances usually have a mortgage lending limit of 90 to 100 percent of the balance. The same applies to home savings accounts. Prerequisite: The assets are in an account in Germany. For life insurance, the mortgage lending limit of 80 percent applies to the current surrender value.
The valuation of equities as collateral for corporate financing is more complex: Here, a distinction is made between the valuation of shares in domestic companies where a lending limit of around 60 percent is assumed and foreign companies in which 40 percent is the lending limit. The basis is the current price.
Savings and savings bonds
Life insurance / surrender values
Securities and shares
Receivables and current assets:
When it comes to lending receivables, most banks typically charge a very high percentage of the value of the claims as collateral. The reason for these high discounts is mainly due to the fact that the utilization of receivables for banks is very time-consuming. But beware: If a company plays with the idea of assigning its own claims on factoring, this must not have previously used as collateral. An assignment is then no longer possible.
Many customers ask if the current inventory can be used as collateral. However, as these are not always available and are difficult for banks to exploit, many banks reject warehouses as collateral or set very low valuations of their value.
Goods / warehouse
In addition, guarantees may be used through surety banks or directors’ guarantees from the shareholders of a company if sufficient collateral is not available.
When are independent appraisers and experts required to value collateral?
Independent appraisals are especially in demand for commercial real estate – and are usually requested separately by the bank. Often, however, the appraisals are created by banks in-house. For other collateral such as movables, the values are determined via value table or expert opinion. In general, this varies from bank to bank.
Attention: bankers are in the truest sense of the word happy to play safe and give more collateral from the company for a financing, as would actually be necessary – the keyword overcollateralization has in the past often employed German courts. The reason: If existing credit lines are collateralized, there is a risk that the company lacks financial scope for further investment. Banks not only secure the loan, but also try to retain the customer. If the collateral is tied to a deal with the bank, the trader can not muster up on competitors.
Which collateral for corporate financing are particularly popular with bankers?
The answer is simple: Anything that can be quickly and safely made into money and costs the financial institution as little as possible is a safe bank for bankers. Cash assets and secure guarantees are therefore always usable as collateral. Securities that are subject to significant fluctuations in value are less popular: these include equipment such as vehicles, tools and machines or equities. Surprisingly: Although real estate and life insurance policies are very stable in value, they can often only be utilized with great delay.
This results in the following order when it comes to the popularity of collateral in corporate financing:
When it comes to psychological security, it’s not about achieving a certain value, but about keeping the company’s shareholder in charge. In this way, even if there is insufficient assets and the face value does not affect the actual lending, the responsibility of the partner should be emphasized. An example of this can be direct liability guarantees.
The term financial covenants describes additional contractual arrangements between the lender and the borrower. In doing so, companies that receive a loan are required to comply with certain economic requirements – and to provide the lending financial services provider with the relevant key figures on a regular basis. If the company deviates from these contractually agreed figures, for example, depending on the contract, the interest may increase due to the greater risk of loss, a kind of penalty may be required or even the loan agreement may be terminated altogether. Frequently, financial covenants also speak of substitute security because they represent a protective function for the financial services provider.
What is the best way to document collateral for corporate finance?
In order to prove the collateral, entrepreneurs should bring with them directly to the bank discussion directly proofs. These include, of course, the last account statements for assets such as bank balances and savings contracts, the corresponding contracts for life insurance policies and the receipts for receivables and papers. The same applies to real estate. If there are already reports from impartial experts, entrepreneurs should definitely bring them with them.
Which documents you should also take with you to a first bank conversation, reveals our practical checklist to check off:
Checklist Documents First Bank Talk
What can be done if there is no collateral?
For companies that have no or insufficient collateral, there are still many opportunities for corporate financing.
First of all, it makes sense to ask for more than just an offer to finance. The valuation of collateral differs from bank to bank. Anyone who seeks multiple offers through comparison platforms such as Marchmain family will play it safe and receive comprehensive transparency – also with regard to the valuation of collateral for corporate financing.
Another option for financing with little or no collateral is provided by indemnity grants : guarantee banks assume the role of collateral and guarantee a certain percentage of their financing. Marchmain family cooperates with renowned promotional banks such as KfW , NRW.BANK and Investitionsbank Berlin, as well as guarantee banks – every request is automatically checked for eligibility so that no further subsidies are missed.
Advice on financing with grants or generally on the subject of collateral in corporate financing? Just ask Marchmain family for free, enter financing requirements and get advice from personal and independent financing experts:
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Special case special financier
Depending on financing needs, companies may also resort to financiers who value collateral differently and offer alternative financing solutions to traditional bank credit. Specialized financiers have now become established in the market in all industries, focusing exclusively on certain financing products: leasing or factoring , as well as purchasing financing. The advantage for companies: collateral is rated differently here than from the classic banker and thus allows for more financial flexibility – even without collateral. According to industry figures of the German Factoring Association 2017, factoring companies realized over 232 billion euros in turnover. In the area of leasing, the Association of German Leasing Companies reports for 2017 of 67 billion euros that the members of the association have realized for their customers in terms of investments. Both business areas are growing strongly. The same applies to goods purchase financing.
If there are no valuable collateral, equity capital or mezzanine capital is a suitable solution. In case of an investment, the company receives additional equity. Mezzanine capital is often an unsecured subordinated loan, which is made available to the company in order to make it possible to finance it, for example through a classic loan.
Marchmain family works with more than 220 financial institutions and therefore knows financiers who best value or even waive collateral. Complex financing with mezzanine capital is also possible through Marchmain family – we are happy to advise you.