Lack of assets available to offer as collateral or security, Financial Accounting

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Q. Lack of assets available to offer as collateral or security?

If SMEs wish to access bank finance for instance, then banks will wish to address the information problem referred to above. First banks will monitor loan applications to assess the underlying the management team, product or service, the market addressed and importantly, any collateral or security that can be offered. It is this final point which is of interest here. Moreover investigating business plans banks will look to see what security is available for any loan provided. This phase is probable to involve an audit of the firm's assets and detailed explanation of any personal security offered by the directors and owner managers. Collateral is important for the reason that it can reduce the level of risk a bank is exposed to in granting a loan to a new business. In assessing a business security and plan a bank would make an assessment of the risk of the business and any loan interest rate will reflect that risk. A key characteristic for accessing bank finance is therefore in the assessment of risk from the information gathered and the security offered.


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