By Emeka Anaeto

We ended last week’s   discussions on this   topic with some points on CASH SECURITY/A LTTTER OF SET-OFF where we noted that most banks threat cash as the best type of security for loans. We also stated two ways by which cash could be held as security.

Other issues discussed include how to use life assurance policies or guarantees to secure business loan from your bank.

In this concluding part of the discussions on this topic we raise some other issues around use of cash security for bank loan.

First you can only use cash as security when the customer has two or more accounts (whether current, savings or deposit or any other account).  One of them will have to be in credit usually savings or deposit account while the other will be in debit which means it is the later that incurred the loan liability. The former is then used to secure or as security for the later. Needless to say that the amount in credit in the former account should always be in excess of the amount outstanding in debit in the later account.

Bank

In cash security, the borrower would enter into a written agreement  with the bank stating the terms of the transactions. The written agreement can also be referred to as a ‘Letter of Set-off’.

In the event of the borrowing account (the later account) falling short of required inflow within the period set out in the ‘Letter of Set-off’ the bank would automatically debit the former account with the required amount and credit itself as loan repayment transaction.

These are the remaining forms of security for bank loans: 

DOMICILIATION

Domiciliation means the borrower pledged or mortgages his income or funds inflow in favour of the bank so as to ensure repayment of the loan secured by domiciliation. This is a special type of security as it serves two purposes.   It is a security on its own and it is also a source of repayment for the amount borrowed. To make this directive effective, borrower would be required to get whoever that is the source of the income to pay in favour of the bank up to the tune of the loan outstanding.

ASSIGNMENT OF CONTRACT PROCCEDS

This is similar to domiciliation but the loan repayment is strictly tied to the business it is funding. In situations where the customer has LPO to execute or he is a general contractor that has no tangible security to offer except the amount due from the LPO or his contract, the bank may be willing to accept the assignment of the LPO or contract proceeds as security for the credit facility.  This security can only be acceptable provided.

• The contractee is financially capable to pay at maturity or at the completion of the contract;
• The customer is capable of executing the contract as agreed by the contractee so as to ensure payment;
• The contractee has not received notice of any prior assignments.

ASSIGNEMENT OF BOOK DEBTS

Also related to the two forms of security above is assignment of book debts. A book debt can be assigned to a bank as security.  Book debts is the total outstanding money owed to a company by its debtors obliged to pay within a short time.   Book debts are accepted only when there is no other security, which can be offered. To ensure that the book debts come directly to the bank, a domiciliation agreement is entered into by the borrower; whereby the debtor is notified about the agreement and he agrees to make payment directly to the bank.