In Blog 1 of this series, we highlighted the main business securities that a lender shall consider when lending to a business available. In this Blog, will highlight some of the major benefits that lending with security brings to borrowers and lenders.
The blatantly obvious benefit to a lender in obtaining security is that it allows them a better chance of recovering the sums owed under the loan. What then are the benefits to the borrower?
In secured loan transactions, often the borrower will be able to borrow much larger sums than would otherwise be available in unsecured lending. This is of benefit to the borrower as without granting security, they would otherwise not have access to significant sums of capital to grow their business. Lenders are risk adverse creatures. Often they will not even consider granting a loan to a small or medium sized business without significant security in place. The reason is that small and medium sized businesses go bust all the time, and the lender is less confident on obtaining the sums
Another benefit to the borrower is that secured lending tends to be cheaper than unsecured lending. The reason for this is that interest rates for lending tend to be linked to the level of risk associated. If there is less risk of not getting their money back, a lender will loan funds at a better rate. Additionally, secured lending demonstrates a level of creditworthiness which may have a positive impact on the credit rating of a borrower. A better credit rating will provide better access to finance at cheaper rates.
Are there any other benefits to the lender besides greater likelihood of recovery if the borrower does not, or indeed cannot pay? There is a psychological benefit to obtaining security for the lender in that the borrower is far more likely to try to make the payments if they have to give up their assets in default.
Another benefit to lenders who take security on loans is that they will rank ahead of unsecured creditors in the event of insolvency or sequestration. Depending on the type of security, a lender will be able to grab at the cash in the insolvency/sequestration chest before those debtors who do not have such security. Being first when it comes to insolvency or sequestration can be vital. Nine times out of ten, the chest is not going to be enough to pay everyone who is owned money. Strategically, being higher up in the queue of people owed money means a better chance of recovering sums owed.
The next blog in this series will highlight the potential introduction of a new type of Scottish security for borrowers and lenders to consider. The ‘Statutory pledge’ which may come into effect soon as a consequence of the Moveable Transactions (Scotland) Bill which is currently being considered in the Scottish Parliament.