How Risk & Collateral Drive Loan Approvals

Key Takeaways

• Banks vs. Asset-Based Lenders (ABL): Banks prioritize borrower credit risk; asset-based lenders prioritize collateral quality.
• Collateral perspective differs: Business owners value inventory at purchase cost, while ABL value it at liquidation levels.
• Risk assessment matters: Lenders focus on repayment security, not just business potential.
• Borrowers improve approval odds: By understanding lender criteria, addressing risk, and aligning expectations.
• Speaking the lender’s language: Builds stronger relationships and increases access to needed capital.

For many business owners, securing financing is one of the most critical steps in supporting growth, managing cash flow, or overcoming challenges. But one of the biggest disconnects between borrowers and lenders lies in how each side views risk and collateral.

Understanding this difference is essential. Business owners who align their perspective with that of lenders not only improve their chances of securing financing but also strengthen long-term banking and lending relationships.

How Banks Assess Risk: Credit First

Traditional banks focus heavily on the creditworthiness of the borrower. Their decisions typically center around:

• Financial statements: Balance sheets, profit-and-loss statements, and cash flow.
• Financial ratios: Liquidity, leverage, and coverage ratios.
• Business performance trends: Revenue stability, profitability, and growth history.
• Credit history: Past repayment behavior and overall financial reputation.

In short, banks want assurance that a company can generate sufficient cash flow to repay its loan obligations.

How Asset-Based Lenders Assess Risk: Collateral First

Asset-based lenders (ABL), on the other hand, focus more on the value of a borrower’s collateral than on their credit profile. Their primary concern is whether the loan can be repaid through the liquidation of assets if the business falters.

Key areas of evaluation include:

• Accounts Receivable (A/R): Turnover, dilution, and customer concentration.
• Inventory: Valued not at what the business paid, but at its liquidation value in a worst-case scenario.
• Other Assets: Equipment, machinery, or real estate that could serve as additional collateral.

This approach means that even businesses with weaker financial performance or credit history may still qualify for financing, provided they have strong collateral.

The Borrower’s Perspective: Why Disconnects Happen

Business owners often see their assets, especially inventory, as a goldmine. They tend to value it at purchase cost or at what it contributes to their operations. But lenders take a more conservative view, focusing on what those assets would bring in liquidation if the business failed.

This difference in perspective creates friction. While the borrower highlights growth potential and market opportunity, the lender zeroes in on worst-case recovery scenarios.

Bridging the Gap: How Business Owners Can Strengthen Their Case

To secure financing, business owners need to step into the lender’s shoes. That means:

• Reframing collateral value: Understand liquidation vs. purchase value.
• Highlighting collateral quality: Demonstrate strong receivables turnover, minimal customer concentration, and low dilution.
• Strengthening the business plan: Show feasibility, realistic projections, and proactive risk management.
• Acknowledging risk openly: Address lender concerns before they raise them.

This demonstrates financial sophistication and helps build trust.

Why Lender Perspective Matters for Long-Term Success

Securing financing is not just about getting approved; it’s about creating a sustainable relationship with your lender. By adopting the lender’s perspective:

• Borrowers improve approval odds on the first attempt.
• Trust grows, making it easier to secure future financing.
• Cash flow aligns with strategy, supporting long-term business goals.

Ultimately, lenders need to be confident that if your business succeeds, they’ll be repaid from cash flow and if it fails, they’ll be repaid from collateral. Business owners who understand this balance are best positioned to achieve financial stability and growth.

The role of collateral and risk assessment is central to every lending decision. While business owners may view their assets through an operational or growth lens, lenders, whether banks or asset-based lenders, evaluate them with repayment security in mind.

By understanding these perspectives and presenting collateral and business plans accordingly, borrowers can bridge the gap, secure the financing they need, and build resilient partnerships with lenders.

In today’s competitive financial environment, speaking the lender’s language isn’t optional—it’s a strategic advantage.

About Celtic Capital
Companies looking for working capital to cover operating expenses, fund growth, increase buying power, and take advantage of vendor discounts and rebates turn to Celtic Capital. With an appetite for more complex transactions, Celtic Capital has a history of success in crafting creative, flexible asset-based financing solutions from $500,000 to $8 million with no financial covenants.

As an independent lender, working with companies nationwide, Celtic Capital is willing and able to alter price and deal structure and expand lines of credit to handle its clients’ increased revenues; and when cash flow is an issue, will look toward providing an inventory facility to help offset lost cash flow.

If you know of, or are, a business in need of non-traditional financing, contact Mark Hafner at 800.742.0733 or mhafner@celticcapital.com, or visit us at celticcapital.com.