When a borrower requests a loan from October, we may ask for security for the loan. Securities can reduce the risk of capital loss because we can fall back on the guarantor or collateral in case of default. The securities that apply to a project are added to the project description. At October, we classify 6 types of securities, which we will briefly explain in this tutorial.
A personal guarantee is a promise made by an individual, usually the business owner, to repay the loan if the borrower cannot. If the borrower is unable to make the repayments, we can demand payment from the individual who signed the personal guarantee. This puts their personal assets at risk, such as their savings or home. A personal guarantee can be for the entire loan amount or part of it. The terms and conditions are set out in a separate agreement with the guarantor, but you can find the essential elements in your loan agreement.
A corporate guarantee is when one company promises to repay a loan or debt on behalf of another entity (like a subsidiary, joint venture, or partner). The guarantor agrees to pay back the loan if the borrower doesn't. We can demand a payment from the guarantor to get the money back. A corporate guarantee can be for the full amount or part of the loan, just like a personal guarantee. The guarantee provided by BpiFrance for certain French loans is also classified as a corporate guarantee.
A state guarantee is a guarantee provided by the government to improve access to credit for borrowers. State guarantees can be provided for a variety of purposes, such as to support small and medium-sized enterprises. State guarantees can be an effective way to encourage private investment and support economic growth, particularly in regions or sectors that are underserved by traditional lenders. The conditions of each guarantee are different. Therefore, we have written a separate tutorial per state guarantee here.
A business mortgage is a type of loan security that uses a real estate asset as collateral for the loan. In a business mortgage arrangement, the borrower pledges their property as security for the loan, which gives the lenders a legal claim on the property in case the borrower defaults. In case of default, we can then sell the property and use the proceeds to repay the lenders.
A business pledge is a type of loan guarantee that uses movable assets, such as inventory, equipment, or accounts receivable, as collateral for the loan. In a business pledge arrangement, the borrower pledges their assets as security for the loan, which gives the lender a legal claim on the assets in case the borrower defaults. In case of default, we can then sell the assets and use the proceeds to repay lenders.
Guarantee by a Guarantee Fund
A guarantee by a guarantee fund is a type of loan guarantee that is provided by a specialized institution. In a guarantee by a guarantee fund arrangement, the borrower obtains a loan from a lender, and the guarantee fund provides a guarantee to the lender to cover a portion of the loan amount in case of default. The borrower pays a fee to the guarantee fund for the guarantee.
If a security applies to a loan, it does not imply that the company cannot default. You may lose the capital you invested if the guarantor is not solvent when the guarantee is invoked or if the value of the collateral deteriorates. For more information on how to value a security, you can read our tutorial: What is a security on a loan?
Moreover, this tutorial explains the basic principle of each type of security. There can be nuances per project or per country of origin of the project.