Defining human collateral, we refer to it as the effort a business owner and those working with or for him or her put into the operation of an enterprise, whether that entity be new, acquired or inherited.
We find that the interest level of an entrepreneur can first be identified in the business plan written for the enterprise. With the exception of franchises, all independent business owners that have submitted business plans demonstrate their true level of investment in the enterprise by the way they handle the creation of and expression within the business plan.
For example, if someone simply downloads a templated form and fills in a few blanks to describe what they consider to be a truly brilliant idea, then that is not likely to be a successful business. The owner is not willing to invest the time and effort into communicating their ideas in writing. They’re taking short cuts from the beginning and clearly, not willing to invest capital or human collateral in an effort to communicate their goals and aspirations. In such cases, we would deem those to be more fantasy than reality. A true entrepreneur should be able and willing to invest serious time, effort and personal funds into the writing of a clear and well-thought out business plan. He or she is investing human collateral in the company.
Human collateral can also be measured in the manner in which the entrepreneur speaks about their business. Someone who believes they have a truly successful concept believes strongly in that, and has thought it out extensively. Someone who just thinks they have a brilliant idea is excitable, becomes agitated when questioned and rarely has answers to the serious questions anyone might raise with a new idea. We look for that in both verbal and written communication. Within business plans, this is often found in repetitive statements that do not really explain the subject in sufficient depth to give the reader confidence.
Banks and financial institutions should give Human Collateral as much consideration as tangible collateral when making lending decisions. Where a plan is presented, if it doesn’t have the requisite planning and thought essential to successful execution of the plan, then the bank is simply handing money over to someone who will never succeed.
In considering loans or lines of credit, human collateral should also be factored in as a sign of the dedication that entrepreneur will have to reach success and in particular, loan maturity. The investment the entrepreneur is willing to personally make in their enterprise is part of human collateral’s definition as well. How much is the owner willing to dedicate of themselves to the business. Do they understand it will take long hours and few days off to reach success, or, do they think that running a business is simply a 9 to 5 work arrangement? Those showing an unwillingness to work long hours, often without financial rewards in the short term are not invested and therefore, a high risk for the bank.
In researching business plan evaluation procedures for the International Society of Business Plan Evaluators (ISBPE), we determined that Human Collateral can be identified, measured, scored and reported and that it is one of the best indications of long-term success.