To determine eligibility for a loan, GreenStone and many financial institutions use the five C’s of credit to make a determination – character, capacity, capital, conditions, and collateral. Rightfully, the word “collateral” can leave you with an anxious feeling about putting things like your land, home or even commodities up to secure a loan.
The good news: With a lender who works with you, focused on ensuring your capacity to repay is sufficient to be able to make the payments on your loan, you should be comfortable securing your promise to repay the loan.
Why does my lender need collateral from me?
Before a lender issues you a loan, they want to know you have the means to repay it. Collateral is an extra layer of security for the lender to ensure there is less risk by having the collateral to cover the loan if the financial need arises.
When a lender has a claim on one or more of your assets for collateral, it’s called a lien. For example, if you put your home up as collateral to secure a loan to build a barn, your lender has a lien on your home.
We view a lending relationship as a partnership, where GreenStone is the “silent partner” of the business we invest in. Your willingness to pledge collateral is part of our evaluation of your confidence in your ability to financially perform as you have projected. GreenStone is a cashflow and earnings lender, with collateral serving as a secondary source of repayment in the unlikely event you are unable to make scheduled payments from the ongoing farm business’s day to day operation. The amount of collateral you are willing to pledge is factored into the final pricing of your loan, in general terms the more you pledge, the better your loan pricing.
Proactive, respectful communication is the key to any healthy relationship. GreenStone’s philosophy is to develop a strong relationship with each customer, practicing and encouraging proactive, two-way communication. This sets the foundation for working through financial challenges when they arise. Our goal is to arrive at a “win – win” solution when the need to modify existing loan terms is needed. We refer to this as “rebalancing or restructuring” your balance sheet debt that matches your available cash flow to service your debt which we do for our customers when it is needed.
Unfortunately, relationships sometimes break down. Thankfully, this is a very rare occurrence with our customers as evidenced by our customer satisfaction which has consistently scored in the mid-90s out of 100 points for many years now. It is only when there has been a serious default of the terms of a loan agreement that communications have broken down and we are unable to arrive at a mutually agreeable plan, directed by you, to correct your financial challenges. We work with you to evaluate your plan to adjust your business that will result in improved net income margins needed to service your debt in a timely manner. When operational improvements are not adequate, we evaluate your plan to sell non-productive assets. If we cannot agree on the first two steps, we will work with you on a timeline to refinance your GreenStone loans with another lender. When it becomes apparent that we will not be able to arrive at an agreement to reorganize or refinance, we are left with the last option of legally enforcing the terms of the loan agreement in the event of default. This may include foreclosing on the collateral pledged to secure the repayment of the loans.
How much collateral you should expect to pledge
In general, the higher your risk profile, the more collateral we will request to secure your loan(s). Most financial institutions, including GreenStone, typically take collateral based on what we are being asked to finance along with additional collateral pledge requests customized to your individual financial position. For example, if you are taking out an operating loan, at a minimum, you would pledge operating assets like crops and accounts receivable. If you’re taking out a land loan, you will use real estate you own as collateral.
For a short-term loan, which is typically under ten years, our maximum loan to appraised value of collateral is 75%. For farm real estate, we typically underwrite a loan to an appraised value of 65% or less of your assets, and with a country living loan, the loan needs to equate to a value of 80% or less of the capital value. Variance to this guidance is considered on a case-by-case basis.
Your lender will discuss options for your collateral to decide what is best for you to put up to secure the loan you are seeking.
Does every loan require collateral?
Unsecured lending terms are typically reserved for the lowest risk customer for short-term lending circumstances. We will evaluate the strength of the other Four C’s of credit that would mitigate the need for collateral. If you financially qualify, it is a request we will consider.
We’re Here to Help
At GreenStone, we want to make the loan approval process as simple and streamlined as possible. Pledging collateral should only be as concerning as the idea of not being able to repay your loan. Our team of experts is here to walk you through every step of the process.
GreenStone offers a full list of loan products and expert staff to meet your individual needs. Give our local team a call to discuss your options!
This article was published in Michigan Farm News here.
