When you take out a loan for your commercial purposes, you may be asked to secure the loan by putting up some of your assets as security.
This means that the lender can take possession of the asset charged and sell it in the event that you default on your loan.
If you take out multiple loans, you may be asked to put up security for each one – which can be tricky when you have limited assets.
This is where you might come across cross-collateralised security.
Cross-collateralisation
Cross-collateralised security is collateral against a loan where one asset or group of assets is used to secure multiple loans.
If the borrower defaults on its loan, the lender can seize any or all pledged assets to recover the debt.
It is common in commercial finance because it provides flexibility for businesses to access financing while still providing security for lenders.
However, lenders may be reluctant to take on cross-collateralised security in some circumstances as it does increase the risk to them.
I have used cross-collateralised security – What do I need to know?
If you use assets to secure multiple loans, you need to think carefully about structuring your payments.
Cross-collateralised assets are often not sufficient to cover all the loans you have taken out, which could mean that lenders go without if you default on a loan.
This could damage your ability to access credit in the future and leave you with debts that you are unable to pay.
Before entering into an agreement of this type, you should seek independent legal advice to ensure that you are not in a position to be pursued for further liabilities once your security has been seized.
Additionally, you must ensure that you have reached an agreement with your loan provider of exactly which assets are being put up as security and that any cross-collateralisation is agreed to.
In order to ascertain if the security you have granted is cross-collateralised, we will need to review the security documents. We should be able to obtain these from Companies House.
The initial costs for reviewing the security and providing you with advice, would be no more than £1,000 (plus VAT and disbursements).
For advice on drafting and signing commercial loan agreements, please contact Dashna at DashnaMorarji-Sagoo@palmerslaw.co.uk or by calling 07903 631780.