Often new graduates head for a bank with a business plan and little else in their hands. After many years of school, it is understandable that you would not have much in the way of savings or assets. Nevertheless, banks expect that a business owner will be contributing to the new business in the form of collateral.

Collateral is simply an asset (something that has measurable value) that you can use or pledge to help with startup costs and to “secure” the loan. A few banks will give you an unsecured loan if you have a fantastic credit rating (over 700 probably), but those are few and far between. Secured loans (those secured with collateral) have lower interest rates than unsecured loans, and some banks won’t lend to startups without collateral, so you’ll need to think about what you can use for this purpose.

To give you an idea of what you might have available, begin by creating a personal financial statement, which lists all of your personal assets and liabilities. List the assets at market value and liabilities at their current market value. For example, if you have a car with a value of $5,000 and you owe nothing on it, you could refinance the car to get cash for your business loan. You can use the SBA’s personal financial statement (online at http://www.sba.gov/sbaforms/sba413.pdf) as a template.

If you have a home, you can use the equity (your ownership) in the home as collateral. In some cases, you could get a second mortgage for this purpose or you could use the second mortgage to finance the startup. One bank wanted a young DC to collateralize her $80,000 loan with $80,000 in equity from her home! In this case, it might be easier for her to take out a second mortgage for $80,000 and use it to start the practice. Mortgage loans often have lower interest rates than business loans.

Equipment that you have already purchased for your practice might also be used as collateral. In most cases, the bank will allow you only a small amount of the purchase price, unless you purchased it new, because used equipment is difficult to sell. Banks prefer cash.

Other assets you could use are stocks, bond, mutual funds, and CD’s. The bank will need to confirm the market value of the asset, but you don’t have to sell it in order to use it as collateral.

Money from friends and relatives, if it has been given to you as a gift or a private loan, is a good source of collateral, if you can find a kind friend or relative to help. Don’t try to use a large cash advance from your credit card as collateral; this transaction might backfire if the bank sees the transaction.

In general, the more liquid the asset you use for collateral, the better. Cash is the most liquid asset, followed by those CD’s, then stocks and bonds, then a tangible asset that can be sold quickly. Put everything together and take it to the bank with your great business plan. If you are still turned down, consider other alternatives (this Chiropractic Economics article has some suggestions: Buying your first practice? Use this road map to find opportunities and avoid pitfalls).

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