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Why do banks ask for collateral?

August 31, 2020

Do you want to take out a business loan with a bank? Then security is almost always requested. But what are these certainties? And why do banks ask for this? The bank wants to get security back in exchange for lending money. In other words: the bank lends you money as an entrepreneur and in return wants a right to something that you own or use. Since the financial crisis, banks have become less willing to lend. Moreover, the demands on entrepreneurs who ask for financing are getting higher. Banks do this to limit risks. As an entrepreneur, are you unable to repay a loan including interest? Then a bank will be left with outstanding financing. Banks want to limit this risk by means of collateral and reduce it to an acceptable level. As an entrepreneur, do you have enough securities to offer? Then a bank will be more willing to provide the requested business loan.

What types of collateral are there?

Banks make a distinction between personal collateral and collateral collateral. There are four types of personal securities:

  • Banks most often ask for joint and several liability . This personal security means that you as an entrepreneur are personally liable for the repayment of the loan. Do you not meet the repayment obligation? Then the bank can claim your private assets.
  • Another security that can be requested is the surety . This means that someone else - a person, a company or the government - guarantees your loan. Are you unable to pay off the loan? Then the bank can, via a detour, go to this third party to still collect the repayments.
  • The guarantee is in line with the guarantee . This security ensures that a third party guarantees your financing. This means that the bank can go directly to this third party as soon as you are no longer able to pay off the loan.
  • The mortgage on your owner-occupied home also serves as security. If you ask the bank for financing, you can offer the bank the second right of pledge. The mortgage lender has the first right of pledge.

Do you want to take out a business loan? Then you can also provide collateral security at the bank. These are:

  • The mortgage on the business premises. Just like the personal mortgage, a business property can also be subject to a mortgage. This mortgage is on the company's balance sheet. That is why you can count this mortgage as collateral.
  • Right of pledge on inventory and stock. The right of pledge is a security right that you can offer to the bank. This security relates to goods that are not registered goods, such as movable property such as stock and inventory.
  • Right of pledge on debtors . The right of pledge on (future) receivables also serves as security for repayment of the financing. Do you use factoring ? Then you sell your debtors to a factor company, and you can use the right of pledge on these debtors as security.

What requirements does a bank set for collateral?

You cannot just hand over any security to a bank. A number of requirements are set for these securities. The value of the security plays the most important role. In general, the value of the collateral should be at least as high as the value of the business loan. This requirement applies not only to the time of taking out, but to the entire term of the loan. Does the value of the security decrease? And will it fall below the value of the loan? Then it is customary to provide additional security.

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