Securing Advances-No Transfer of Ownership or Possession of Movable Asset

Figuring out the best way of securing long and short term loan from financial institutions is what many businesses do. Let us be frank here that there are a times when your business runs out of working capital.

Most businesses prioritize borrowing from banks. Do you also secure advances from banks? If your answer is yes, then you must have noticed that they have got strong credit practices. They do this in order to ensure safety of their funds and shareholders’ funds too.

Many businesses have disappeared and never to return in the market just because of loans. This is because of:

1. Wrong decisions.

2. Wrong purpose.

Now you are asking me, “What about the wrong decisions and the wrong purpose?”

You see, the wrong decision is when you approach a financial institution and seek the wrong type of loan. The one that is not compatible with your business. Another wrong decision is when a business borrows beyond its capacity to pay.

The wrong purpose is when you secure a business loan and use it for other purposes. You start paying for your college fees and other personal expenditures.

Have you ever thought of or heard about hypothecation? I recall my lecturer taking me through this topic and that has made me reminisce about it today. He spoke of two terms-the hypothecator and the hypothecatee. He went further telling the class that the hypothecator is the borrower while the lender is the hypothecatee.

To define hypothecation, Hart says, “Where property is charged with the amount of a debt, but neither ownership nor possession is passed to the creditor, it is said to be hypothecated.”  I consider it the best option.

If you assign the stock in your business or raw materials which are still under process as collateral to the hypothecatee, then you are able to dispose or use the same in any way you like. As a borrower, you execute a document called a ‘Letter of hypothecation’ or ‘hypothecation deed.’ This is to provide that the hypothecatee has the power to take the property assigned as collateral if you fail to service the loan.

Did I say that the hypothecatee takes the property? Yes, now the hypothecation is becoming more of a pledge. In fact, there is no difference between it and a pledge once the hypothecatee exercises this power.

The hypothecatee will be paying periodic visits to your business premises in order to assess stock. Also there will be a hypothecation notice displayed on your stock so as to ensure that you do not create a charge of the same to another lender.

However, note that under this method of securing advances, you’re only allowed to part with the stock through sale or manufacturing. The value of such stock sold or manufactured as ascertained by the hypothecatee should be replaced or otherwise proceeds be paid to the hypothecatee.