Collateral for corporate financing: What is the banker worth?

Corporate financing without sufficient collateral? For many banks unthinkable. If you need a loan to finance investments, you have to secure it. But what collateral for corporate financing is required? What counts as collateral? And how do companies get financing, even if the collateral may not be sufficient?

What is corporate finance collateral?

In addition to future income (cash flows), which are determined by the banks based on annual financial statements and the BWA, equity (and the equity ratio) is decisive for lending by financial service providers.

»Banks generally rate cash flow more highly than collateral. If the figures are not correct, even the best collateral for company financing is of little use. Alternative financing can be a solution here.

If the cash flow is right, collateral comes into play. These can be, for example, guarantees from guarantee banks or directly enforceable guarantees from the shareholders of a company. But what exactly is suitable as security for corporate financing – and how is the value calculated?

How is collateral for corporate financing calculated?

When it comes to the value of the collateral, financial institutions such as banks do not normally calculate with the market value of the property, but usually take a buffer into account. In this way, fluctuations in value during the loan-to-value period should be balanced out. There are also risks of realization, which banks include in the valuation of collateral for corporate financing. These discounts can sometimes be very high – depending on the type of collateral, the loan-to-value ratio (the percentage of the value of the collateral at which banks lend the property) can vary.

“In addition, the valuation of collateral depends on the credit risk strategy of the financial institution – and can thus differ depending on which bank a company requests financing from.”

Property:

For real estate, for example, the loan-to-value limit is usually between 60 and 80 percent of the value. The valuation of private real estates such as apartments or houses is done internally at most institutes – i.e. by employees of the bank. For larger commercial properties or apartment buildings as collateral, many credit institutions also require the assessment and evaluation of impartial experts.

• Commercial and residential real estate
• Houses
• plots
• Apartments

Movables:

Mobile objects such as machines, vehicles, technical systems, or operating facilities are often used as collateral for corporate financing. In most cases, this requires a value of more than 10,000 euros and general usability – this refers above all to special machines or custom-made products that would not be usable for the financier without great effort. Vehicles such as cars and trucks are usually valued at around 50 percent of their current value as security. Similar values ​​result from the transfer of ownership of plant and machinery as security. However, since this value fluctuates greatly with age, the value is usually reduced by 20 percent every year.

Operating equipment and facilities are only included as security at 40 percent of their value. In general, however, it also applies to movable property that all banks rate collateral differently, these percentages are only intended to provide a first loose orientation.

• machinery
• equipment
• tools
• vehicles
• shop fittings

Assets:

Assets such as savings and bank balances normally have a loan-to-value limit of 90 to 100 percent of the balance. The same applies to building savings accounts. Prerequisite: The assets are in an account in Germany. For life insurance, the loan-to-value limit is 80 percent of the current surrender value.

Valuing shares as security for corporate financing is more complex: Here, when determining the value, a distinction is made between shares in domestic companies, for which a loan-to-value limit of around 60 percent is assumed, and foreign companies, for which 40 percent is the rule as a loan-to-value limit. The basis is the current market value.

• Savings accounts and savings bonds
• Life Insurance / Surrender Values
• stocks and shares
• fixed deposits

Receivables and current assets:

When it comes to lending on receivables, most banks typically charge a very high percentage of the value of the receivables as collateral. The reason for these high discounts lies primarily in the fact that the realization of receivables is associated with a great deal of effort for banks. But be careful: If a company is considering assigning its receivables via factoring, it must not have used them as security beforehand. An assignment is then no longer possible.

Many customers ask whether the current inventory can also be used as security. However, since these are not constantly available and are also difficult for banks to sell, many credit institutions reject warehouses as security or use very low valuations of the value of the goods.

• requirements
• Goods/warehouse

In addition, guarantees from guarantee banks or directly enforceable guarantees from the shareholders of a company can be used if sufficient collateral is not available.

When are independent appraisers and experts required to determine the value of collateral?

Independent appraisals are particularly in demand for commercial real estate – and are usually requested separately by the bank. However, the reports are often prepared in-house by banks. For other collateral such as movables, the values ​​are determined using a value table or expert opinion. In general, however, this differs from bank to bank.

Attention: Bankers like to play it safe in the truest sense of the word and have the company give them more security for financing than is necessary – the keyword over-collateralization has also often concerned German courts in the past. The reason: If existing lines of credit are over-collateralized, there is a risk that the company will lack the financial scope for further investments. In this way, banks not only secure the loan but also try to bind the customer to them. If the collateral is tied to a transaction with the bank, it is difficult for the entrepreneur to approach competitors.

Which securities for corporate financing are particularly popular with bankers?

The answer is simple: Anything that can be turned into money quickly and securely and causes the financial institution as little cost as possible is considered a secure bank by bankers as security. Cash assets and security guarantees are therefore always good to use as collateral. The collateral that is subject to strong fluctuations in value is less popular: This includes movable property such as vehicles, tools, and machines or shares. Surprising: Although real estate and life insurance are very stable in value, they can often only be realized with a long delay.

This results in the following order when it comes to the popularity of collateral in corporate financing:

Psychological Safeguards

Psychological securities are not about achieving a certain value, but about making the company’s shareholder responsible. In this way, the responsibility of the shareholder should be emphasized, even if there are insufficient assets and the nominal value does not influence the actual lending. An example of this can be directly enforceable guarantees.

Financial covenants

The term financial covenants describe additional contractual agreements between the lender and the borrower. Companies that receive a loan are obliged to comply with certain economic requirements – and to regularly inform the lending financial service provider of the corresponding key figures. If the company deviates from these contractually agreed figures, for example, depending on the contract, interest rates may increase due to the higher risk of loss, a type of penalty fee may be charged, or the loan agreement may even be terminated entirely. Financial covenants are often referred to as substitute security since they represent a protective function for the financial service provider.

What is the best way to prove collateral for corporate financing?

To prove the collateral, entrepreneurs should ideally bring evidence directly with them to the bank interview. In the case of assets such as bank balances and savings contracts, this naturally includes the most recent account statements, in the case of life insurance policies the corresponding contracts, and, in the case of movable property, the purchase receipts and papers. The same is true of real estate. If reports from impartial experts are already available, entrepreneurs should also bring them with them.

What can you do if there is no collateral?

For companies that cannot provide any or insufficient collateral, there are still a variety of options when it comes to corporate financing.

First of all, it makes sense to get more than just an offer for financing. The valuation of collateral differs from bank to bank. Anyone who obtains several offers via comparison platforms such as COMPEON is playing it safe and receives comprehensive transparency – also about the evaluation of collateral for corporate financing.

Another possibility for financing with little or no collateral is subsidies with liability releases: guarantee banks assume the role of collateral and vouch for a certain percentage of the financing. 

Special case special financiers

Depending on their financing needs, companies can also use financiers who evaluate collateral differently and offer alternative financing solutions to traditional bank loans. Specialist financiers have meanwhile established themselves in all sectors of the market and deal exclusively with certain financing products: This can be leasing or factoring, but also goods purchase financing. The advantage for companies: Collateral is valued differently here than by a classic banker, thus enabling greater financing leeway – even without collateral. According to industry figures from the German Factoring Association, factoring companies turned over more than 232 billion euros in 2017. In the area of ​​leasing, the Federal Association of German Leasing Companies reported 67 billion euros for 2017, which the members of the association realized in investments for their customers. Both business areas are growing strongly. The same applies to financing the purchase of goods.

If there is no valuable collateral, equity capital or mezzanine capital is a suitable solution. In the case of an investment, additional equity is added to the company. Mezzanine capital is often unsecured subordinated loans that are made available to the company to make financing, for example via a classic loan, possible in the first place.