Anyone who wants to take out a loan is often asked by the bank – especially in the case of slightly burdened Agency and low income – for so-called loan collateral. But what does “loan security” mean, why does the bank require such a security? Which securities can be offered to the bank by the borrower? An overview of the various possibilities for securing loans and credits.
There are situations and customer groups where it can be difficult to obtain a loan. In such cases it helps to be able to offer the bank or credit institutions collateral. This can improve the chances of being granted the desired loan. This is particularly true for small businesses, the self-employed and freelancers. However, it can also be a solution for people who do not have a flawless Agency to help them out of a jam. The possibilities of such securities in credit transactions are manifold and range from private guarantees to so-called letters of comfort. But what exactly is hidden behind these terms?
Definition of surety
A guarantee is when a third party – this can be a person or an entity – guarantees the repayment of the loan amount. In other words, if the borrower defaults or is no longer able to repay the loan, the lender turns to the guarantor and claims the outstanding debts.
Family members, friends or colleagues can step in as private guarantors. It is important that they have a good Agency score or that they in turn have the necessary assets that are recognised as collateral by the lending bank. The private guarantee is mostly used when taking out instalment loans or consumer loans.
Such a guarantee is issued by so-called guarantee banks. These act as guarantors – for a fee – for example when deposits are made or credit requests are made. Sometimes the lender also willingly arranges such a guarantee bank.
Tangible assets Securities
The second option for non-personal collateral is so-called physical collateral in the event of difficult conditions for credit approval. These can be liens, for example mortgages on own real estate, or securities. As a self-employed person, you also have the option of assigning open claims against your own customers to the bank and thus securing the desired loan.
Land charge as security
When banks have a choice in securing loans, they usually prefer security in material form. This includes the land charge, for example. The land charge remains at the same level for the duration of the existing liabilities. Only when all instalments of a loan have been repaid does it expire.
The mortgage is different. This is reduced in parallel with the open remaining loan amount. With a mortgage, you transfer the right to your own house or apartment to the lender. The value of the property is decisive for the possible amount of a loan or credit.
If you are a private investor in shares, bonds, funds and other types of securities, you can offer them to the lender as collateral. However, securities do not provide 100% security for banks, as their value can fluctuate. For this reason, securities etc. are often only accepted as security on a percentage basis of the desired loan amount.
Assignment of receivables
A trader who has outstanding claims on customers can assign these to the lending bank. This bank then assumes the role of creditor and collects the defaulting receivables from its customer’s customer. However, banks do not generally accept open receivables as collateral. It is not uncommon for banks to check whether an open receivable is also recoverable.
Other special securities of self-employed persons
Depending on the type of business, self-employed persons can also offer the bank so-called letters of comfort as security. However, this special type of security is not an option for small and sole traders or independent freelancers. As a rule, a parent company (patron) acts as a kind of guarantor for a subsidiary.