What can I use for loan collateral?

April 2008

"My banker says he wants collateral for a loan, but my inventory consists mostly of software, which he doesn't like, and we have no receivables because we sell everything on the Web with credit cards. And we rent our office space, so there are no real estate assets. Help!"

Mike: The truth is, bankers don't want to get stuck holding any collateral that can't easily be converted into cash. They're mostly interested in lending to businesses that are consistently profitable, with good positive cash flow and a spotless credit history.

If your business can't meet these requirements, the alternative is for you to personally guarantee the loan, and perhaps to secure the loan with personal assets, like your investment portfolio or other real estate you own.

And if your own assets aren't enough, talk to your senior managers and even your directors. It's possible some of them will help secure the loan with their own assets in return for equity or options.

Is it safe to give credit to a one-client customer?

November 2007

"We've been asked to extend a line of credit to a company that has very solid financials. Ordinarily I wouldn't hesitate, but the company has essentially only one customer--a big customer, but one that could pull the plug on a moment's notice. Advice?"

Mike: This could be a very risky situation. It's especially common for small companies to rely on just one or two "flagship" accounts, and management often gets lazy about handling slow payments and resolving satisfaction issues. Then suddenly there's a liquidity crisis that puts the whole business at risk.

I'd start by taking a close look at the financial statements for both your customer and his flagship account, if possible. Are they both adequately capitalized? Is there any history of stretched payables, litigation, or defaults? Is there a strong strategic or personal relationship between the two companies, or will the big customer jump ship the moment a competitor offers a better price?

Even if there are no red flags, you should limit the credit you extend to no more than 75% of the amounts due from your customer's large client. This will limit your own exposure if a worst-case scenario occurs.

How can I protect myself if a buyer defaults?

September 2007

"I'm considering a deal to sell my company's technology assets in return for a three-year note and some cash. Do I have any protection if the buyer goes under before paying me in full, or if they simply decide to stiff me? As you can see, I'm a little paranoid about this buyer, but this is by far the most lucrative offer I've found."

Mike: You're definitely not being paranoid. In effect, you're making a large unsecured loan to a sub-prime borrower. A bank almost certainly wouldn't lend money on these terms, so why should you?

The easiest way to protect yourself is to arrange for the technology assets (and any enhancements) to become collateral for the loan. That way, if there's a default or a bankruptcy, you'll regain clear title to your intellectual property and you'll have plenty of leverage if the buyer is late on payments at any point during the payoff period.