My website

Cross Collateralization – What Is It And Why It’s Bad For Your Business

Cross-collateralization is a term used when the collateral for one loan is also used as collateral for another loan. For example, if a person / company has borrowed from the same lender, an excavator which is secured by the excavator, also a skid steer which is secured by the skid steer, and so on, these assets can be used as cross-collaterals for all the loans. This means that if payment cannot be made on the excavator, to retrieve their lost income, the lender will come and repossess the excavator AND the skid steer under their Cross Collateralization clause.

Brendan Scotter of Commercial Point Finance recalls a recent experience by one of his clients with their bank was a great demonstration that, it may be advisable to consider spreading your financial commitments across a number of lenders.

In this case the client runs a dry hire machinery business providing equipment to mines under contract.

They have an Overdraft and a Property Loan with their bank. The security their bank holds for this is a mortgage over their residential property together with a Fixed and Floating Charge (over the assets of their business). They also have Equipment Finance Facilities with the same bank. Their bank manager had told them that the Equipment Finance facilities were "stand alone" and not linked in with the security for the Overdraft or Property Loan.

Brendans client needed to increase his existing Property Loan or Overdraft Facilities. The bank declined the application. The reason given was that his bank was concerned with the mining industry slowing, due to reduced growth and projects being delayed. This was despite the client running a successful business. Brendans client was stuck, they needed increased banking facilities for new contracts won, but their bank said no.

An approach was made to another bank whom were happy to provide increased banking facilities and pay out their original bank. This was on the basis that the new bank received the residential property and a fixed and floating charge over their business as security. The new bank was not in a position to also pay out the equipment finance facilities with his current Bank.

The client went back to their original bank and explained what was proposed and their bank stated that as they hold a Fixed and Floating charge over their business, the Equipment Finance was captured under this security due to their Cross Collateralization clause in all their finance contracts. This meant that they would have to pay out all banking and equipment finance facilities with their original bank first. As the 2nd bank as not prepared to do this and his client was stuck again.

Lessons to be learnt

  • Consider keeping your core banking facilities through one Bank and place your equipment finance through other financiers. As was seen, from the above example, whilst a Bank may say that the Equipment Finance is "stand alone", when assessing their facilities the Equipment Finance will tend to be included. By having all your eggs in one basket this could impact you on obtaining an increase in your core banking facilities or being able to change Banks.

 

  • Talk to a professional such as Brendan Scotter of Commercial Point Finance. With access to a large number of financiers and products they may be able to assist you with diversifying your equipment finance to another financier or across a number of financiers.

So with a new financial year underway and your business plans for the year being bedded down, I trust that this article has enlightened you as to how best finance your equipment.

Source: Commercial Point Finance Australia

Commercial Point Finance has a wealth of experience and long standing relationships with all the major and minor lenders in Australia. Give them a call to discuss you particular circumstances – 02 9453 0300 or visit www.commercialpointfinance.com.au
This website was created for free with Own-Free-Website.com. Would you also like to have your own website?
Sign up for free