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Most loan officers require that you offer a form of collateral when applying for a commercial loan. It is usually in your best interest to offer a valuable form of collateral to ensure that you receive a favorable interest rate and repayment terms. The asset should be equal to the value of the loan amount you are requesting. Disagreements sometimes arise between business owners and lenders about the actual value of a piece of collateral. For this reason, you should consider having your inventory, real estate, business equipment or other asset professionally evaluated even if it is not requested.
Who is Qualified to Evaluate Collateral?
According to the federal Farm Credit Administration (FCA), the person who formally assigns value to your collateral must be impartial, reputable and professionally competent. He or she should have extensive experience evaluating the specific type of collateral that you are offering in association with your bank loan. If you have never had an asset appraised performed before, an Internet search or asking your business associates for a recommendation should connect you to the right person. The American Society of Appraisers (ASA) has a database of over 3,500 appraisers who are available to evaluate your business asset.
Guidelines and Recordkeeping
There are specific guidelines in place when you are offering personal real estate as a form of collateral. If the value of your property is between $250,000 and one million dollars, you can have it appraised by a state licensed or certified real estate appraiser. Only state certified real estate appraisers may evaluate property that is worth more than one million dollars.
If you want to make a strong case for your asset's worth, it is important to keep detailed records about it. This includes what you originally paid for it, whether the item is paid in full, any maintenance that has been performed on the asset and its current value. If you are offering equipment as collateral, you may be able to command a higher value by proving that it receives regular maintenance and timely repairs.
Prepare an Asset List in Advance
If you know that you are going to apply for a business loan in the near future, you can make things easier on yourself by preparing a list of your company assets in advance. By doing so, you will be prepared to answer an appraiser's questions the first time you speak to him or her. You can simplify the process by using a blank Excel spreadsheet and making a column for each of the following:
When you are asked to produce an asset list, don't make the mistake of giving the loan officer a depreciation list instead. This poses many problems and can also be misleading to the banker. Some of the primary problems with using a depreciation list instead of an asset list include:
Make Sure You Choose an Accredited Appraiser
One of the most common mistakes that business owners make is being too hasty to get their appraisal completed. They don't take the time to do their homework and ensure that the person they hire to do the appraisal has the proper credentials. The American Society of Appraisers offers an accreditation program that helps quality appraisers stand out from the rest.
According to ASA, people who earn the credential of certified appraiser have completed a peer evaluation process and a rigorous course study over the period of several years. They are expected to demonstrate commitment and dedication as well as proof of professional experience. ASA requires its members to adhere to the values of the Appraisal Foundation as well as its own code of principles and ethics. The primary goal of the ASA accreditation program is to ensure that appraisers provide an objective and accurate opinion of the value of an asset.
Questions to Ask Prior to Hiring an Appraiser
When you contact a potential appraiser, you should be prepared with several interview questions to ensure that this person is the right one for the job. Some of the questions you should ask include:
Before you sign a formal contract with an appraisal company, you need to ensure that the report you will receive is compliant with the Uniform Standards of Professional Appraisal Practice (USPAP). A banker may not accept your appraisal report if is non-compliant or comes from an unaccredited appraiser.