Need a loan, but don't have much to offer? Here's what to consider and how to protect yourself when using personal assets to secure a business loan.
From UPS to Walmart, America is filled with stories of entrepreneurs who took a small personal loan and turned it into an empire. Sam Walton famously started his retail franchise based on a $20,000 loan from his father in law—a risk that paid off for both parties. That was 65 years ago, but today's credit crunch has led many businesses to seek creative ways of financing. That often includes asset loans, which let the borrower put up some personal property as collateral. Borrowing against your own property—whether that's a fleet of company vehicles or a prized baseball card collection—can be hazardous if not done properly. That said, it might be the only choice for some new businesses.
"You need capital to get things going. It's tough if you don't have a track record, if you don't have a business, to find outsiders to believe in your concept," says Tom Taulli, a tech adviser, blogger, and author whose books include a handbook on buying, selling, merging, or valuing a business.
How exactly is it done? We asked financial experts about what to look out for to make sure your personal assets don't get whisked away before you know it.
Using Personal Asset Loans: Why Seek an Asset Loan?
If you're thinking you need to borrow against some of your property—whether personal or professional—you're not alone these days, Taulli says. While the country seems to have been recovering from the economic downturn, people are more likely to turn away from banks and more toward family, friends, angel investors, or other local sources for a loan. But you still need to put something on the table to guarantee the debt, Taulli says.
"With the housing crisis, people don't have the kind of assets they used to have," he says. "A lot of personal loans are from family and friends. They're not as rigorous. It may be more like: I'll pledge my car, baseball card collection, whatever. The bank probably just wants real estate at the end of the day."
Mitch Jacobs, founder and CEO of On Deck Capital, which helps small businesses get financing, says the condition of borrowers overall has declined recently, meaning entrepreneurs sometimes have no choice but to put up something to show they have faith in their own business plan.
"There's more unemployment, periods where people have holes in their income, there's people who don't have steady salaries," he says. "That tends to put people in a little bit of a credit crunch. If they need financing, they leverage assets a little harder."
When you put some assets on the table, it shows the lender you believe in your business, even if this is your first entry into the market.
"If you've got a complete start-up that hasn't sold anything yet, it's going to be hard to get a loan," says Dan Drechsel, CEO of FTRANS, a company based in Atlanta that helps small businesses manage cash flow. "There's got to be some track record."
Start-ups also benefit from these kinds of loans because they save lenders the effort of creating a full financial forecast for the company—an often time consuming task that's sometimes impossible for a new company.
"If the business doesn't have a clear financial picture, then an asset based loan can be an easier way to access capital," Jacobs says.
Using Personal Asset Loans: What Property is Useful?
The simplest and most common form of an asset loan is found in just about every city—the pawnshop. Odds are, your business is looking for something more legit. Experts say your better off considering these asset options before you pawn your laptop.
Protecting Personal Asset Loans: How to Cover Yourself
Wagering your personal assets on your business comes with no shortage of perils. Certainly there are people who have lost their homes when businesses went bad. Experts offer these tips to protecting yourself before entering into a loan.