Secured Lending
Degrees of risk and mitigation UNDERSTANDING LENDING Lending money is a very simple process. One person gives another a sum of money and expects that the money will be repaid at a given point in the future. The risk comes in getting the money back and how the borrower can repay the money. The first consideration with lending money is affordability. When lending to an individual, you would make an assessment of their income and their bills to see if they had enough surplus cash to cover fixed, regular loan repayments. Lending to a business is broadly the same, you would look to see if the business is making profits and
generating enough cash in order to repay the loan.
naturally be repaid from this income.
The next consideration is assessing whether the borrower could still afford to repay the loan in the future. For an individual borrower, you would assess their current job, past employment history and also consider whether any changes in interest rates will affect any current lending they have.
WHY TAKE SECURITY?
With a business, you would need to look at the market they operate in, the people within the business, the business operations and any other factors that may affect their ability to repay the loan. As long as affordability remains after this assessment, the loan should
If security has been taken over the loan and then something changes and the borrower is unable to make normal repayments, there is more protection for investors to recoup money from missed payments. Security is an undertaking by the borrower to use other assets that have a value to repay the loan should they not be able to make the repayments through normal means.
The Security Risk Ladder
Higher Risk Unsecured
A cross guarantee is an undertaking by a group of companies to repay a loan. All parties are jointly and severally liable for the repayment. Cross guarantees enable lenders to recover debt from whichever company has the ability to repay.
Personal Guarantees
Cross Guarantees
Debenture
Sometimes known as a Chattel Mortgage, specific asset security allows the lender to take a fixed legal charge over a specific asset that is not property or land.
Specific Asset Security
Second charge Property If a borrower fails to make the agreed repayments of a loan, a first legal charge gives the lender the right to decide what to do with the asset, meaning lenders are able to recoup the proceeds of any sale up to the amount of the debt which the charge secures.
First Charge Property
A personal guarantee is an undertaking by a borrower or a third party to repay a loan from personal assets. Whilst these are legal documents enforceable by law, if the person giving the guarantee does not have assets to repay the loan in full, there will likely be a loss unless an agreement to pay over a period can be reached.
A debenture is a fixed and floating charge over the assets of a company, including the stock, trade receipts and any machinery or property not already subject to a formal fixed charge. A debenture gives the lender the right to take control of a business, known as administration, should the borrower default on its facilities and the lender need to recover its loan.
A second legal charge allows a borrower to use any equity in their asset as security against another loan. Second legal charges have secondary priority behind the first charge lender, meaning the second charge holder is generally unable to do anything with their charge without the permission of the first charge holder. They are also required to wait for repayment until the first chargeholder has either been fully repaid, or repaid up to an amount agreed by a Deed of Priority.
Lower risk Secured by cash
Contact Our Lender Team For more information DOMINIC RIDDLES New Registrations Advisor T: 0161 482 7528 E:
[email protected]
MARTIN HEELAM Business Development Manager T: 0161 482 7531 E:
[email protected]
Disclaimer Details of this guide were correct at time of publication. This document is for information purposes only and nothing in it should be taken as a statement or representation of fact or as definitive investment advice for your particular situation. We always recommend that you speak to an independent financial adviser about finding a lending strategy that is right for you. Information in this document does not form part of any offer or contract. Whilst endeavoring to ensure complete accuracy in this document, Assetz Capital cannot accept liability for any errors.
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