Types of Collateral
1. Real Estate
Land and Building represent one of the commonest types of collateral in use especially for term loans and revolvers. These can be houses, office building, shopping centers, warehouses or factory buildings. Real Estate will be ideal as collateral for medium to long-term loans.
2. Plant and Equipment
This refers to manufacturing plant and machinery, trucks, generating set, drilling rigs, presses, forklifts and similar items. These are usually appropriate collateral for term loans, revolvers, working capital loans, syndications. It would be advisable to obtain a professional valuation of the plant and machinery for use as collateral to enable the lender ascertain the appropriate amount of loan to sanction.
3. Natural Reserves
Oil and Gas reserves as estimated by qualified engineering firms and at agreed price assumptions and any discounts applicable can be used as collateral for certain types of loans, especially long term loans and project-tied loans. The borrower is assumed to be the owner or is in control of such natural resources.
4. Marketable Securities
Stocks/Shares and Bonds of quoted blue-chip companies, certificates of deposits (CDS), treasury certificates and other similar marketable securities, which can be readily converted to cash, may be used as collateral for short term loans. The amount of loan extended would depend on the value of such marketable securities with some margin or discount to cushion any adverse fluctuations on the market value of such securities. For the lender to adequately protect itself the borrower should duly execute all the necessary transfer forms though undated and, his signature under seal duly verified by the relevant registrars for share certificates used as collateral. These should be completed before the loan is disbursed to the borrower. The essence is that if the loan goes bad for whatever reason, the lender will be in a good position to realize on such securities without recourse to the borrower.
5. Inventory
Inventory can be used as collateral in five common ways as asset-based financing: Floating Lien, Trust Receipts (floor planning), Chattel Mortgage, Terminal Warehouse and Field Warehouse Receipts.
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