What Is Collateral Risk?
There are a number of ways to predict how likely a borrower is to repay a loan, and they don't all have to do with a simple credit score. Sometimes, lenders have to consider how willing the borrower is to put up collateral.
As noted by a recent article on Bloomberg Businessweek, many small businesses cannot get loans unless the owners offer up some property to cover their obligations in the event of a default. in one example, a medical technology and service business that earns $2-3 million in annual revenue was unable to get a $300,000 loan from the Small Business Administration (SBA) unless the owners offered their house as collateral. That's because SBA guidelines require that borrowers pledge "worthwhile" collateral until the loan is secured. Business owners who do not have the required collateral may only qualify for a loan on an undersecured basis if they prove that they have enough cash flow to repay it, among other criteria.
Kimberly R. Shappee, a senior credit officer at the Bank of Montana in Missoula, said that this willingness to put up collateral is often a good indicator of risk.
"If you think about it from the government's perspective, they will come in with 75 percent of the value to make the loan good if there's a default," she told the news source. "If a borrower won't put his house on the line, why would he expect all of us to put our tax dollars on the line to guarantee the loan? Banks are protecting depositors' money—why would they risk it on someone who's not all-in?"
It is true that lenders must protect their own assets while they try to work out loans with borrowers. Using risk assessment tools can help them make smart decisions about lending.
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There are a number of ways to predict how likely a borrower is to repay a loan, and they don't all have to do with a simple credit score. Sometimes, lenders have to consider how willing the borrower is to put up collateral.
As noted by a recent article on Bloomberg Businessweek, many small businesses cannot get loans unless the owners offer up some property to cover their obligations in the event of a default. in one example, a medical technology and service business that earns $2-3 million in annual revenue was unable to get a $300,000 loan from the Small Business Administration (SBA) unless the owners offered their house as collateral. That's because SBA guidelines require that borrowers pledge "worthwhile" collateral until the loan is secured. Business owners who do not have the required collateral may only qualify for a loan on an undersecured basis if they prove that they have enough cash flow to repay it, among other criteria.
Kimberly R. Shappee, a senior credit officer at the Bank of Montana in Missoula, said that this willingness to put up collateral is often a good indicator of risk.
"If you think about it from the government's perspective, they will come in with 75 percent of the value to make the loan good if there's a default," she told the news source. "If a borrower won't put his house on the line, why would he expect all of us to put our tax dollars on the line to guarantee the loan? Banks are protecting depositors' money—why would they risk it on someone who's not all-in?"
It is true that lenders must protect their own assets while they try to work out loans with borrowers. Using risk assessment tools can help them make smart decisions about lending.
[:es]There are a number of ways to predict how likely a borrower is to repay a loan, and they don't all have to do with a simple credit score. Sometimes, lenders have to consider how willing the borrower is to put up collateral.
As noted by a recent article on Bloomberg Businessweek, many small businesses cannot get loans unless the owners offer up some property to cover their obligations in the event of a default. in one example, a medical technology and service business that earns $2-3 million in annual revenue was unable to get a $300,000 loan from the Small Business Administration (SBA) unless the owners offered their house as collateral. That's because SBA guidelines require that borrowers pledge "worthwhile" collateral until the loan is secured. Business owners who do not have the required collateral may only qualify for a loan on an undersecured basis if they prove that they have enough cash flow to repay it, among other criteria.
Kimberly R. Shappee, a senior credit officer at the Bank of Montana in Missoula, said that this willingness to put up collateral is often a good indicator of risk.
"If you think about it from the government's perspective, they will come in with 75 percent of the value to make the loan good if there's a default," she told the news source. "If a borrower won't put his house on the line, why would he expect all of us to put our tax dollars on the line to guarantee the loan? Banks are protecting depositors' money—why would they risk it on someone who's not all-in?"
It is true that lenders must protect their own assets while they try to work out loans with borrowers. Using risk assessment tools can help them make smart decisions about lending.
[:it]There are a number of ways to predict how likely a borrower is to repay a loan, and they don't all have to do with a simple credit score. Sometimes, lenders have to consider how willing the borrower is to put up collateral.
As noted by a recent article on Bloomberg Businessweek, many small businesses cannot get loans unless the owners offer up some property to cover their obligations in the event of a default. in one example, a medical technology and service business that earns $2-3 million in annual revenue was unable to get a $300,000 loan from the Small Business Administration (SBA) unless the owners offered their house as collateral. That's because SBA guidelines require that borrowers pledge "worthwhile" collateral until the loan is secured. Business owners who do not have the required collateral may only qualify for a loan on an undersecured basis if they prove that they have enough cash flow to repay it, among other criteria.
Kimberly R. Shappee, a senior credit officer at the Bank of Montana in Missoula, said that this willingness to put up collateral is often a good indicator of risk.
"If you think about it from the government's perspective, they will come in with 75 percent of the value to make the loan good if there's a default," she told the news source. "If a borrower won't put his house on the line, why would he expect all of us to put our tax dollars on the line to guarantee the loan? Banks are protecting depositors' money—why would they risk it on someone who's not all-in?"
It is true that lenders must protect their own assets while they try to work out loans with borrowers. Using risk assessment tools can help them make smart decisions about lending.
[:tr]There are a number of ways to predict how likely a borrower is to repay a loan, and they don't all have to do with a simple credit score. Sometimes, lenders have to consider how willing the borrower is to put up collateral.
As noted by a recent article on Bloomberg Businessweek, many small businesses cannot get loans unless the owners offer up some property to cover their obligations in the event of a default. in one example, a medical technology and service business that earns $2-3 million in annual revenue was unable to get a $300,000 loan from the Small Business Administration (SBA) unless the owners offered their house as collateral. That's because SBA guidelines require that borrowers pledge "worthwhile" collateral until the loan is secured. Business owners who do not have the required collateral may only qualify for a loan on an undersecured basis if they prove that they have enough cash flow to repay it, among other criteria.
Kimberly R. Shappee, a senior credit officer at the Bank of Montana in Missoula, said that this willingness to put up collateral is often a good indicator of risk.
"If you think about it from the government's perspective, they will come in with 75 percent of the value to make the loan good if there's a default," she told the news source. "If a borrower won't put his house on the line, why would he expect all of us to put our tax dollars on the line to guarantee the loan? Banks are protecting depositors' money—why would they risk it on someone who's not all-in?"
It is true that lenders must protect their own assets while they try to work out loans with borrowers. Using risk assessment tools can help them make smart decisions about lending.
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