Whilst commercial lawyers may not provide detailed financial advice along the lines that accountants or tax lawyers might do, however Rowe Bristol Lawyers are an important source of advice when it comes to certain financial transactions a business might enter into, especially concerning the legal implications of them.
One such financial transaction is when a business seeks and receives a loan or other form of credit, where the lender requires security on the loan. This is akin to a mortgage company securing the mortgage they lend a homeowner to purchase their home against that property. In this article, we will explore secure business loans and specifically outline the three main types of security that banks and other lenders will normally accept.
Why Businesses Need To Raise Capital
There are several reasons why a business may need to raise capital in the form of a loan, credit, or even a mortgage. In addition, borrowing in whatever form it takes is far more common within the commercial world than many people realise. The view is that, given many companies are worth millions of dollars they would not need to borrow money, but that is a mistaken assumption.
Even for a corporate giant, much of its worth might be in stock, land, commercial properties, machinery, and intellectual property to name but a few, and it is often the case that its liquid assets, aka cash, are low by comparison. This can also apply to small businesses on a much lesser scale, but the principle is still the same. If a business, large or small, wishes to raise cash, then the main option they have is to borrow it. That cash could be required for the following reasons:
- Expansion
- Purchasing of stock and raw materials
- Investing in plant, machinery, research, or product development
- Property or land acquisition
- Buying another business
- Covering slowdowns or cash flow issues
- Currency fluctuations, especially if the business trades internationally
3 Main Ways Banks Will Take Security For Business Lending
Business Assets
In the same ways an individual’s assets might be used as security for a personal loan, lenders will secure loans against the assets of a company under what is known as a general security arrangement. In this type of arrangement land and property owned by the company’s directors are not used as security.
The secured company assets can either be tangible such as machinery, office equipment, and stock, or intangible such as intellectual property rights, trademarks, and even the brand name, however, statutory licences that the company possesses are not included. Shares in the company can also be taken as security too.
A variation of this arrangement is where, not only the company’s assets are used, but, in addition, any leases it has for premises are used as security. This means the lender can sell the business as a going concern should a default occur, which is preferable to them than selling each business asset separately.
Land Mortgage
If a company owns any land, then it can enter into an arrangement with a lender whereby any lending is acquired via a mortgage and therefore the land that it owns is what acts as security. Accordingly, if the company defaults on the mortgage, then quite simply, the lender would be entitled to take possession of the land that was used as security.
Directors’ Personal Guarantees
Depending on the circumstances and the size of the loan being applied for, the bank may accept director guarantees as security, or insist that they are included in addition to the other security options we have mentioned.
In its simplest terms, a director guarantee means any signatory to it has to repay the monies lent if the company is unable to do so. A positive consequence of this from the lender’s perspective is that it incentivises company directors to manage the company property meaning loan repayments are more likely.