It’s not who you know it’s what you own -23

If collateral is the specific asset used to secure the loan, capital is the
sum of all your assets. It is exemplified in the role-play below.
Paulie: Donna, may I borrow $20, it’s Sunday and I
can’t get to the bank.
Donna: Let me see your bank statement.

Capital is defined as the combined value of what you own with a bias
towards liquidity. Lenders are reluctant to fund a loan unless they have
concrete evidence you have sizeable financial assets to fall back on.
Lenders take comfort in knowing you possess valuable things or have
piles of cash you can use if you have a hard time repaying the loan.

Lenders will want to see that you also have a lot to lose. For business
loans, lenders want to know that you have personally made a financial
commitment to the business. Lenders know that the amount of money
someone has at stake in the event of default is directly related to how
hard they will work to pay the loan as agreed.
Lenders will look to your personal resources to provide as much of the
needed capital as you can afford to put at risk. Depending on the capital
needs, you cannot expect any lender to loan 80 percent or more of the
capital, as they may for a home or investment real estate. It is also
possible to borrow the capital of others to use to secure a loan. The
closer the asset is to cash, the more liquid it is. Liquid assets that don’t
change in value are the best kinds of capital for the purposes of getting
a loan. Non-liquid assets that are relatively stable, like real estate, are
another good source. Non-liquid assets of a volatile nature such as
stocks or collectables are the least desirable to a lender.

You can improve your capital simply by acquiring more of it, or
increasing the value of what you have using the techniques discussed in
the section on collateral. You can improve your capital by making concerted efforts to increase your savings and decrease spending. I will
go into some specific techniques for living below your means in Chapter
11 and the appendices.

For business loans, you can improve your capital through developing
accounts receivable from customers, or raising capital from
stockholders.

Your primary method of proving your capital to a lender is through your
personal or business net worth statements. The net worth statement
lists the value of your assets, subtracts your outstanding liabilities, and
comes up with the number that is referred to as net worth. Standard
business and personal net worth statements calculate assets by adding
your purchase price and capital improvements, then subtracting
depreciation to arrive at their worth.

You are going to create a net worth statement that is “marked to
market”. This is a statement that reflects the present value of your
assets. For real estate, this is the estimated market value. For an
automobile, consider the market value according to the industry
standard, the Kelly Blue Book.* Assets such as diamond rings and stamp or coin collections also appreciate in value. Consider getting a
new appraisal every couple of years for valuable personal property.

Personal property. Your lender will always assume that your net worth
includes an evaluation of your personal property; so to refrain from
making a statement of the worth of your personal property is a financial
mistake. Use the same rule of thumb that a lender does. Personal
property is usually equal to the value of the dwelling. The lender may
also use the number that you have the property insured for.
Coincidentally, most insurance companies also use the personal
property equals the house value rule of thumb. If you have jewelry or
an expensive collection that boosts this estimate above the basic rule,
get an independent appraisal, a separate insurance rider for the item,
and list it separately on your net worth statement.