by Andy Daniel
An insider’s look on collateral based loan application and how to secure commercial loan with leased Letter of Credit.
Ontario – Major financial institutes take a conservative approach when offering commercial loans to businesses. Several factors are taken into consideration for the eligibility of an application, including credit history, income, revenues, company’s equity and balance sheet. Even with an impressive credit score, most financial institutes will not approve loans without collateral.
Collateral is a solid way to prove to the financial institute that the company is a viable borrower. It’s a security in a form of asset or property pledged against a loan. A collateral can be equal to, less, or greater than the value of the loan.
In a commercial loan application, most financial institution typically request for three common types of acceptable collaterals: cash backed guarantee, property/asset and bank instrument. Letters of credit are generally the most widely used and accepted form of collateral because they represent an irrevocable guarantee of payment in a specified amount. As against marketable securities which tends to devalue over time and can be repossessed by the financial institution should the borrower default on payment or cash backed collateral which requires full upfront payment that entails tying up of precious capital the company could have otherwise use for other purposes.
For these reasons, many companies choose to obtain a letter of credit. Established companies typically look to a line of credit established with their bank and draw upon that line of credit. Banks charge a substantial amount of fee for the service and it often takes quite a long complex process to complete.
For companies with no line of credit or poor credit history, especially the SMEs, obtaining commercial loan can be very daunting. Thanks to many private companies springing up today that provides the opportunity for companies to lease or purchase a Letter of credit for a fraction of its face value from top tier banks and financial institutions.
As in the case of Luxberry Homes from Lisbon Portugal seeking a project loan of 300 Million Euros for property development consisting of a mega residential housing and a luxury shopping complex situated at the heart of the city. The company was largely undercapitalized for the project and could not collateralize their existing line of credit. To get the loan approved however, a Letter of Credit from a first-tier bank among other securities was requested by the lender as a guaranteed form of collateral. They immediately sought help from a reputable collateral service provider.
Upon approaching Trade finance Capital (TFC), one of the leading collateral providers, which quickly moved into action by scrutinizing the project plans and performance reviews, TFC determined that the effective way to accomplish the transaction in one tranche is through a private investment fund lodged in a top tier bank and a letter of Credit is drawn upon it towards the beneficiary. The arrangement was made and a preliminary draft copy of the Letter of Credit was issued for acceptance by the beneficiary’s bank. Upon receipt of the signed draft and other agreements including payment undertaking from beneficiary’s bank, the Letter of Credit was issued via bank swift MT700 to the applicant’s banking coordinates. The collateral was accepted and the project holder closed on their loan.
Andy Daniel, a senior consultant in trade finance confirmed, “the turnaround time for the completion of the transaction and delivery of LOC via swift by TFC is largely determined by the issuing bank and the speed of compliance by the beneficiary. In average, TFC takes within 7 – 10 days to process a collateral.
There are many benefits to using leased collateral to secure financing:
- Borrower do not have to tie up capital or assets to apply for a secured loan.
- Only a fraction (7-15%) of the face value of the LOC is paid to the issuer.
- Secured loans attract a lower interest rate and a longer repayment period than unsecured debt. In the case of default, bank can draw down on the letter of credit.
- Beneficiary can use the money in different flexible ways they wish – bills payment, vacation, purchase a new house or vehicle, pay tuition and board, or repay an expensive loan.
- Secured loans are easier to qualify for with collateral. Borrowers or companies with a poor or imperfect credit score may be eligible.
- This is a good way to rebuild credit by making timely payments. Borrower can repay the loan at any time and save on interest payments.
For more information on how to apply for a Letter of Credit, eligibility and general inquiry, go to http://tradefinancecapital.com and apply for free. There is no cost.
For media inquiries, to arrange for an interview, presentation or an expert quote please contact Andy Daniel at email@example.com