unsecured credit | Guarantees: means of coverage for your loans

Guarantees: means of coverage for your loans


Why guarantee requirements?
Guarantee the different types
On the basis of a number of parameters, the lender will, or will not, demand guarantees from the trader, his company or third parties in order to cover the risk arising from the granting of the credits.

Why guarantee requirements?
Every credit granted by a lender means a risk to him, sometimes larger than the other, that there is no reimbursement. After all, if the debtor is no longer able to meet his commitments, the lender will more than likely not be able to recuperate all his borrowed money.

It is precisely to protect itself against that risk, that banks and other providers of loans want to insure themselves through adequate guarantees, and that prior to the granting of a credit. If a serious problem arises, you must be able to ensure a higher recovery of the borrowed funds through the guarantees provided.

The lender must, among other things, determine the following according to external and own criteria:

the possible risk level of a transaction
the available guarantees and their valorisation
the costs for placing the guarantees
the acceptable level of risk
the quality and strategic importance of the relationship with the customer
the desired remuneration for the borrowed funds
As far as the first point is concerned, namely the risk of the transaction: this is obviously the result of a whole series of risk factors related to the activity of the company, the sector in which the company operates, its financial structure, the profile of the company. entrepreneur, the financed object etc.

The desired remuneration for the borrowed funds, the quality of the relationship with the customer and the acceptable risk level depend on internal parameters at the lender, but also on the risk parameters of the transaction.

As far as the cost aspect for the placement of the guarantees is concerned: this may seem surprising at first glance, but one must be aware that in some cases the lender will prefer to forego a guarantee. This is the case, among other things, if he himself believes sufficiently in the project and / or if he thinks that the costs of placing the guarantee are disproportionate to the benefit obtained. In such a case, the credit is granted unsecured (without guarantee).

But for most SMEs, their financial structure and their repayment capacity will not be sufficient to meet the requirements of the banks. So they will require some form of additional guarantee.

The entrepreneur, for his part, must consider certain aspects before granting guarantees to his financiers:

some guarantees concern only a limited part of the business assets, others are much broader, and others are assets that are outside the company.
some guarantees may be limited in time, in terms of amount or in size of the credit to be covered
the cost price for establishing various guarantees can vary greatly and is sometimes very high
providing private guarantees to cover occupational risks, especially when it concerns a movable or immovable property guarantee, is strongly discouraged
the nature of the chosen guarantees is very important for the company, as some parts of the assets are no longer freely available due to the placement of certain guarantees, which means that the company is sometimes linked to the beneficiary of the guarantee in the very long term.
It is therefore the entrepreneur who has to make a compromise with his financial institution, so that the guarantee requirements of the latter are met, but the entrepreneur still has a sufficient maneuvering space.

Guarantee the different types
Traditionally we distinguish:

the business guarantees that relate to goods with an intrinsic value
the personal guarantees that imply a right of action against one or more persons
the moral guarantees that do not provide the borrower with a genuine legal guarantee
the privileges laid down by law and not resulting from an agreement between the parties
A business guarantee is a preferential claim on a movable or immovable property of the borrower or a third party giving the creditor a pre-emption right on the selling price of that property.

1. Real guarantees
Some of the best-known business guarantees include:

mortgage
collateral based on goodwill
collateral of titles or securities
bank guarantee
insurance, including credit insurance
The guarantees provided by the Brussels Guarantee Fund are also business guarantees and can be decisive for the granting of a financing.

The mortgage is a real right of the lender on a property provided as a guarantee. If the borrower defaults, the bank may demand the sale of the property to repay all or part of the remaining credit balance. In the case of a professional credit, the building taken as a guarantee may be either the building that is financed by the credit to be covered or another building belonging to a third party, for example the entrepreneur himself. It is strongly discouraged to provide private business guarantees to cover professional commitments, but it is not always possible to avoid this.

2. Personal guarantees
The best-known personal guarantee is the bail. Bail is a contract by which the guarantor commits himself to respect the creditor's obligations towards a creditor, if the latter does not. By demanding a deposit, the financial institution extends its guarantee to a capital situated outside the company.

The guarantees that the banker requires are generally solidary and indivisible.

Solidarity implies that in the case of non-repayment of the sums owed by the borrower, the creditor of the guarantor can demand that the latter pays the entire remaining debt, as if he himself is the principal debtor.

Indivisibility implies that if several persons have accepted to be guarantor, the creditor reserves the right to reclaim the full amount from any guarantor. Special care must therefore be taken before guaranteeing and, if possible, limiting the amount and duration

3. Moral guarantees
Moral guarantees do not grant any special claim to the bank. They rely mainly on confidence in the fact that the borrower will fulfill his commitments. When the credit is canceled, the lender will be on the same level as the other creditors, and sometimes even less high.

One of the best known moral guarantees is the mortgage mandate. The mandate is an agreement by which the owner of a good grants an irrevocable mandate to the lender to take out a mortgage on a building. Any conversion of the mandate into a mortgage may be effected without prior notice by the beneficiary of the guarantee, and this at the expense of the client. The mandate costs are considerably lower than those for a mortgage. For the lender a mandate is not a real guarantee, because nothing prevents the borrower from granting a first-class mortgage on the same property, in favor of another lender.

4. Privileges
A privilege is a right granted by law because of the special nature of the claim, giving the creditor the opportunity, in the case of "concurrence of privileges", to be paid as a priority with the proceeds of the assets (or a part thereof). of the company / debtor.

The granting of privileges is reserved to the legislator, who also determines the place (the rank) that has a certain privilege in relation to the other privileges.

Usually a distinction is made between general privileges and special privileges. Special privileges take precedence over general privileges.
The general privileges apply to the whole capital or to an abstract part thereof, and state that a particular claim must be paid before another. In the case of special privileges, a certain good is linked to a certain debt as security. The preferential claim is paid as a priority with the proceeds of that property.

When financing equipment assets, the bank often demands that it be placed in the rights of the unpaid seller (is subrogated).