Is it possible to offer some percent of your Company's shares to a lender as a collateral? How can this be done?
What if the lender sees the project and he is confident that the business can repay back within the stipulated time, is this possible, what are the possible risk for both parties.
Thanks for your kind responses.
The thing is, its not valid collateral. In reality, using shares/interest/ownership of a company as collateral, in my own opinion, is the same as future income, which isnt valid here. The general problem with what youre asking is that most companies that ask for a loan using shares as collateral, specifically startup or low revenue companies, are usually not profitable. So if the company default, the lien that is on the ownership doesnt promise they would recover their money since the company could end up being bankrupt by then. On top of that, it requires the lender to review everything about the company and when I mean everything, I mean everything leaving no stone unturned. Also, it would require an attorney to draft agreements (
never use a generic agreement in this case) as well and for them to also review state,federal or some government statute in regards to what is allowed to be done with a private entity using its ownership as collateral. Some statutes dont prohibit it while some usually do depending on the structure.
My advice is not to even bother with using ownership of a company as collateral in any sort of loan deal until the company is generating a large sum of revenue and showing some form of realistic profit. Youre better off getting a loan at a bank with your house as collateral.