Do you know the difference between “collateral” and “injection”?
If you are considering a loan for a new business or expansion, you need to know the difference. I had an SBA Business Development Specialist explain this to me and I wanted to pass it along to you:
Collateral is assets the lender might be able to convert to cash to pay off the loan if the borrower defaults. For example, if you have a pizza restaurant, the lender could sell all your tables/chairs, kitchen equipment at “liquidation” value, to pay off the loan. That’s why it is harder to get money for a startup, because you don’t have any assets yet.
Injection is your personal ownership in the business at startup. Most banks want at least 20% “injection” so you have a strong incentive to keep the business alive. One banker told me once that banks want you (the borrower/business person) to hurt as much as they do if the business goes bad. That makes sense. Even if you have an SBA guarantee, you may need to put up some money, or get a co-signer to pledge some assets, to get the deal done.
You will need both collateral and injection, along with a comprehensive business plan, to get the deal done.
Tags: baby boomers, business plans, collateral, sbaRelated Stories
POSTED IN: Business Plan, Businesses for Boomers, Finance, Small Business finance and taxes, Starting Up
1 opinion for Do you know the difference between “collateral” and “injection”?
Meredith
Mar 19, 2008 at 9:47 am
Great tip! I don’t think I fully understood these terms and the reasoning behind the lenders’ stance.
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