Assets that may be of concern to your lender include outdated technologies. If your business is a manufacturing concern, a lender will realize that outdated equipment hurts competitiveness.

If you are an investor in a partnership with liability for future capital claims, the lender will discount your income or cash flow projections. Corporations are notoriously illiquid. Plan to have your lender discount net asset value estimates.

Ask for enough money the first time. Don’t put yourself in a situation of having to come back for more money. For example, if you have potential exposure for a $200,000 equity call from an investment, don’t apply for a $100,000 line of credit because you don’t think the partnership could need more.

If everything else is acceptable (cash flow, stability, assets) and you have $200,000 exposure, ask for $200,000! The lender will feel more comfortable knowing you will have enough money to cover potential liabilities and won’t have to approve! another loan to protect the first!

If you own shares in a closely held company, you are virtually unsaleable. Letterhead or “144 paper” cannot be easily sold. It won’t do your lender any good to garnish something on a delinquent loan that can’t be used to reduce your debt. Expect a discounted value.

Personal business valuation is a very complicated area. While his valuation may be perfectly legitimate for a going concern, it does not reflect what could be obtained if he no longer ran the business or if he sold it at a reduced price.

If something were to develop that damaged your business so that it could no longer generate enough cash flow to pay off the loan, then it would no longer be as valuable! About the only thing a lender could sell would be actual tangible assets, which would be used up and depreciated.

While not a problem, certain prepaid assets have little collateral value to a lender because they wouldn’t be worth much at liquidation. For example, if you pay rent or insurance premiums in advance to get a discount, that’s an asset to your business. However, it is of interest to a lender only because it affects your cash flow, not as collateral. The deposits you’ve paid for things such as equipment leases, rent, or utilities also have negligible value.

Troubled Personal Assets

On a personal loan application, there will be a line to estimate the value of your household assets. While your furniture may seem valuable to you for many reasons, a lender will value it at about 10 cents for every dollar of purchase price.

Attach a note to your financial statements indicating that works of art or other collectibles are listed at retail price. If you have current appraisals, include them. If not, note how you arrived at the value (eg, local art gallery challenged).

The lender will consider artwork and collectibles at wholesale value, or about 50 cents on the dollar. That’s why a lender could quickly sell it.

1 Assets that present liquidation problems to their lender will be heavily discounted by the lender.
2 Farm holdings, partnerships, non-income-producing real estate, and shares in closely held companies are prime examples of problem assets.