News & Research Archive

Thoughts on Cash Flow vs. Collateral Lending

Jul 04, 2013

There are a large number of both bank, and non-bank lenders, willing to make loans at a price. One of the most important factors in determining the cost of a loan is the financial strength of the borrower.

Financial strength is often shown as the difference between the amount of money that the borrower is making and the amount of money that the borrower is spending. Financial strength is also shown through a personal financial statement.

Determining financial strength is typically done by reviewing the borrower's tax returns, personal financial statement and credit report as well as related documents as needed. From this information the borrower's "Cash Flow" can be determined. Please note that unreported income is not likely to be counted.

A loan with an extremely financially strong borrower can get an interest rate today (depending upon the terms of the loan and the property) that will most likely never be seen again for decades. This would be considered cash flow lending.

If a borrower has bad credit and especially if there has been a foreclosure the opportunity to get a good loan is limited. The borrower had best be currently making money to even have a chance and don't expect the best interest rate compared to other commercial loans.

The lenders that work with people who either have bad credit or do not show enough cash flow (via tax returns) to cover the monthly payment are private money lenders. These lenders make loans based on the loan amount as compared to value of the property. This is known as collateral lending and due to perceived risk the interest rates are much higher than cash flow lending.

Most people have financial strength somewhere in the middle. Also most borrowers and have no idea of the type of loan that they are qualified for. Furthermore everyone wants the best rate and terms possible.

Where the desire to get the best loan possible becomes a problem is when a borrower thinks that the terms that he can get are better than what he actually can get. This misconception can lead to massive amounts of wasted time or working on deal s that never have a chance to happen.

As a real estate professional who basically sells your time and expertise it is important to know what type of borrower you have.

So how do you find out what type of borrower you have?

At the very beginning of the sales process insist that your buyers put together the following information:

  1. Last three years tax returns, both business and personal complete with all schedules and company provided K-1's.
  2. Have them fill out a financial statement that is very similar to what I have attached.
  3. A copy of their credit report that shows the borrowers continuing obligations as well as their credit score.

With this information you would have a very good start in determining what type of loan that your borrower would qualify for. This will allow you to set the appropriate expectations and avoid headaches during the lending process.

Bill Hand
Vice President, Valley Community Bank


Written by: Bill Hand - Vice President, Valley Community Bank


Hans Hansson is President of Starboard TCN Worldwide Real Estate Services as well as a member of the Board of Directors for TCN Worldwide Real Estate. Hans has been an active broker for over 28 years in the San Francisco Bay Area and specializes in office leasing and investments. If you have any questions or comments please email or call him at (415) 765-6897. You may also check out his website,

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