Whether you work at a conventional bank, leasing company, investment house, or private equity firm, there are several options when it comes to mitigating the risk involved with short and long-term lending. The phrase "collateral" can mean any number of different types of assets that the targeted business has available to pledge as security in a transaction. Depending on the type of company doing the lending or investing, they will identify and independently value the collateral as part of the deal structure.
The following assets are considered the most common collateral:
Tangible Asset Types:
Real Property - Buildings, land, improvements, and certain fixtures
Machinery & Equipment - Typically applied to commercial and industrial business-owned assets. Common examples are construction equipment, trucks, trailers, and machine shops.
Personal Property - Typically identified for individuals and residential properties. Common examples are cash, furniture, household goods, jewelry, and artwork.
Intangible Asset Types: Stocks, bonds, business goodwill, patents, trademarks, customer lists/relationships, established websites, domain names, intellectual property, and trademarks.
From the perspective of conventional banks and leasing companies, tangible assets drive the collateral value assessment when working with businesses or individuals that own a significant amount of real estate and equipment. These organizations understand the overall company value is significantly higher than the sum of the tangible property, however, the ability to “touch and feel” the assets which secure their investment loans and leases brings a higher comfort level.
They are generally in for the long haul with their clients, sticking with them for several years while looking to provide competitive interest rates.
Investment houses, private equity firms, and similar institutions typically take a shorter-term look at the business which creates an opportunity to consider intangible as well as tangible assets when approving and collateralizing transactions. Simply put, overall business value, which combines every asset type into the appraisal equation, is a useful tool for these investors to assess their risk level.
This strategy is logical given the low probability that a significant change in the business will occur when viewing it from a 12-24 month perspective vs. the longer-term bank and leasing company directives.
In summary, collateral is a key component of virtually every investment transaction in the marketplace. Determining the types of assets which will secure these deals depends on the risk profile each company puts into practice. When considering utilizing these types of financial institutions and investment firms, ensure you understand these factors before committing to a business partner.