By Emeka Anaeto
AS stated last week, this is the concluding part of this long series on how to prepare security/ collateral for business loan. We also stated that in this concluding part we will be lumping three inter-related elements of security/collateral, viz, Domiciliation, Assignment of contract proceeds and Assignment of Book Debts.
Last week’s discussion was on Domiciliation where the borrower pledges or mortgages his income or funds inflow (regardless of sources of such inflow) in favour of the lender/the bank so as to ensure repayment of the loan secured by domiciliation.
Assignment of Contract Proceeds is similar to domiciliation but in the case of the former the loan repayment is strictly tied to the business it is funding.
In situations where the customer has LPO to execute or he is a general contractor that has no tangible security to offer except the amount due from the LPO or his contract, the bank may be willing to accept the assignment of the LPO or contract proceeds as security for the credit facility.
This security can only be acceptable provided: The contractee (the institution giving the contract) is financially capable to pay at maturity or at the completion of the contract (whichever one comes first); The customer is capable of executing the contract as agreed by the contractee so as to ensure payment; The contractee has not received notice of any prior assignments.
Also related to the two forms of security above is Assignment of Book Debts. A book debt can be assigned to a bank as security. Book debt is the total outstanding money owed to a company by its debtors obliged to pay within a short time. Book debts are accepted only when there is no other security which can be offered. To ensure that the book debt comes directly to the bank, a domiciliation agreement is entered into by the borrower; whereby the debtor is notified about the agreement and he agrees to make payment directly to the bank.
In concluding, as we had stated at the commencement of this series, the content of this series gives a general requirement/information you will likely need when you are preparing to approach a bank for a business loan. We had also noted that beyond need for a loan, most of the content had to do with financial discipline, book keeping and best practices in financial management which all banks require of all businesses that qualify for a loan.