In the UK, a business can obtain a loan from a bank or other financial institution, normally for the investment of a project or for other business needs. The lender will expect to receive some form of collateral from the business, which will protect the lender if the business defaults on its loan payments. A business loan will be secured by the business’s assets, such as its equipment, inventory, buildings or other property it owns. Additionally, the lender may, sometimes, require the business to get a business loan from another financial institution as well, in the form of a second lien. This type of second lien is known as a second or secondary lien. A lender with a second lien will have junior status to the first lender.
UK law and secured financing
In the UK, secured financing is a form of financing that requires the borrower to put assets, in the form of a security, at the disposal of the lender. The assets put at the lender’s disposal will probably be the business assets of the borrower. The lender will have access to the assets to ensure that the lender can collect the loan from the assets, if the business defaults on its loan payments. If the business borrows money, it is formally borrowing the assets of the business, just as a person who borrows money from a bank or other lender is formally taking that lender’s assets for their own use.
Export finance is a type of financing that is normally provided by export credit agencies, or Ex-CAs, that are private sector entities authorized to provide export financing by governments. These are the export credit missions of the World Bank and the Export Credit Agencies of many governments, such as the German Kreditwirtschaft. These agencies provide both export finance and trade finance.
Trade finance is a broader term, covering all products and services related to the movement of goods and the transfer of money. While export credit agencies and trade finance providers are normally part- or full-time financial institutions, there are many other financial services providers, including: – Brokers who help to arrange financing, such as the Clifford Chance’s specialist trade finance team (a.k.a. Brokers), who specialize in trade finance; – Brokerage firms that provide financing-related services, such as valuation of assets, due diligence and documentation; and – Services that provide financial expertise, such as business plan development, cashflow analysis and project management.
The benefits of secured financing
Secured financing comes with a number of benefits for businesses. Depending on the type of secured financing and the financial institution offering it, secured financing will usually offer a range of benefits, including: – Reduced loan-to-value ratios (LVRs) – Some financial institutions require that the loan secured by assets have a reduced loan-to-value ratio, or LVR, which means that the amount of the loan as a percentage of the value of the assets used as security is reduced. – Reduced loan charges – Some financial institutions will charge a lower interest rate, or loan- Fees or other charges, on loans secured by a lower amount of security. – Reduced debt levels – Some financial institutions will require that the amount of the loan secured by the assets used as security by the business is lower than the amount of the business’s total debt. – Reduced risk – One of the reasons why a lender may want to put a lower amount of security on the loan is that the lender is less concerned about the business defaulting on the loan, if the lender puts a lower amount of security on the loan. – Faster loan decisions – Fast decision times are important to financial institutions, because they need to foresee demand and make decisions on how to allocate financing across different financial institutions. – Other benefits – There are likely to be other financial benefits secured financing offers to the financial institution providing it, as well as to the business receiving it.
Providers of secured financing
In the UK, most secured financing comes from banks, but there are a number of other providers of secured financing, such as insurance companies and investment firms. Most secured financing is provided by banks as loans secured by property, such as residential or commercial property, or as loans secured by stocks and bonds, or other financial assets.
Secured financing in the UK – How is it possible?
In the UK, there is no law that requires a business to obtain its loan from a financial institution. The only requirement is that the loan must be given on “good” terms, which means that it must meet the terms the lender sets out, with no requirement for the business to meet any particular terms. Even so, most businesses will choose to obtain their loan from a bank, because obtaining a loan from a bank is easy, quick and hassle-free.
Legal challenges under UK law with secured financing
Secured financing that relies on the lender’s interest in the business’s assets will be challenged under the Financial Services and Markets Act (FSAMA) 2000. This law makes it a criminal offence for a person to provide financial services that “cause or permit” certain types of market manipulation. One of the types of market manipulation that is prohibited by the FSAMA is “using, or offering to use, a financial instrument as collateral to secure a loan”. It will be important to show that a lender did not use the lender’s interest in the business’s assets as collateral to secure the loan, because otherwise the loan will be a criminal breach of the law.
Secured financing is a type of financing that requires the borrower to put assets, in the form of a security, at the disposal of the lender. This means that the lender can tell the business they can’t use their assets without the lender’s permission. Secured financing may have benefits for a business, depending on the type of secured financing offered to the business and the financial institution offering it. The most common type of secured financing is a loan secured by the assets of the business. Depending on the type of business and the assets used as security, secured financing may have benefits, such as reduced debt levels, reduced risk, faster loan decisions and reduced LVRs.