Things You'll Need:
- Mortgage-free land
- Viable business or reasonable company start-up idea
- Business plan
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Step 1
Determine the amount of financing needed and the company's ability to repay at current market rates. This may appear to be an obvious step, yet many businesses concentrate on their need without having an immediate and strong answer for lenders regarding their cash flow and ability to repay.
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Step 2
Obtain a solid appraisal of the land to be offered as collateral. Do not guess or evaluate the real estate in a vacuum without hard comparable data. Use a qualified appraiser to determine a current fair market value (FMV). Understand that a wonderful mangrove swamp in Louisiana that has been owned by the company for many years may not hold sufficient collateral value on the open market.
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Step 3
Pay off any debt against the land or have the property released if it is part of another collateral package associated with separate commercial loan. There are few, if any, commercial lenders that will offer financing on land as a second position lien holder. Most businesses would not accept the interest rates and other terms offered even if they found a lender willing to loan.
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Step 4
Understand that land, as security, typically will generate only 50 percent loan-to-value (LTV) financing. Therefore, should you be willing to offer raw land with an FMV of $75,000, expect financing of around $37,500 (50 percent). If that is insufficient, plan on offering additional collateral. There is a valid reason for this lender policy. Unlike land with a commercial building upon it, raw land (unless it is farmed) generates no income (e.g., rent). Therefore, land doesn't offer cash flow to pay debt service.
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Step 5
Don't plan on selling or developing the pledged land during the term of the business loan. Lenders seldom release collateral unless it is replaced with security of equal or greater value and is acceptable to the note holder. Therefore, if there are plans to develop or sell the property in 3 to 4 years, and the prospective loan term is 5 to 7 years, the company should consider offering other collateral.
