What Is Financial Collateral;6 Types You Must Know

Financial collateral is something of value that is pledged as security against the repayment of a loan. If the payments are not made, the lender can foreclose through a specified procedure, which may include, among other things, a sale of the collateral. Your inventory of artwork may be collateral for a line of credit. This inventory would likely be secured by the lender using a UCC-1 Financing Statement. Your house or business real estate will likely be collateral for your mortgage.

What Is Financial Collateral;6 Types You Must Know

Types of Financial Collateral

There are different types of collateral:

  • Loans:  We can differentiate personal loans and loans with real collateral.
  • Collection rights:  As a result of transactions with individuals and companies with deferred payment.
  • Exploitation rights: These are income in the form of fees such as royalties , franchises, rentals, etc.
  • Contracts of services: Contracts of supply such as water, electricity, gas, etc., despite being not precise amounts.

Financial Collateral Analysis.

To analyze whether the quality of coverage or support of a collateral is good, we must take into account the following factors:

  1. Predictability  of money flows .
  2. Delay in payments and risk of default and liquidity .
  3. Diversification of  sectoral and geographical risk .
  4. Additional guarantees associated  with collateral.
  5. Legality and regulatory framework  of that asset.
  6. Cross collateralization , in case of collateral of a group of assets, if one fails, the rest can be used to cover that asset.

The most common Collector Securities Are:

Real Estate Mortgage

Real estate can be a residential property, business or industrial property or land. Normally, you can borrow a residential property of up to 75 percent of the market value. For industrial properties, 50-60 per cent of the market value usually applies.

Bail

There are different types of bail. Most prevalent are the prosecution guarantee. It means that the person who signs the guarantor, the guarantor, undertakes to pay as for his own debt. Banks often require at least two people. A guarantor must have good finances and be able to pay the entire debt alone. It is common for the banks to demand that you, as an entrepreneur, go for the guarantee of your company. 

Anyone who has to go in and pay someone else’s debt can, through court, try to claim back the money from the debtor (the one who really owes the money). This is called right of recourse.

Unlimited And Limited Bail

Unlimited guarantee means that the person who has signed the guarantee has undertaken to pay the company’s entire credit. An unlimited guarantee may apply to one or more of the company’s credits. If all the company’s credits are included, it is called the general guarantee. If you have signed up for a general guarantee, you have not only secured the company’s credit right now, but also for all future credit. 

Limited bail means that the person who writes on a guaranty has limited his guarantee commitment, for example by specifying a maximum guarantee amount often corresponding to the credit in question.

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