Who is concernedThis concerns any entrepreneur or company which may be asked by their bank to provide tangible guarantees in respect of a financing application.
PrerequisitesThe prerequisite for a tangible guarantee is the existence of a movable or immovable asset which may be seized and/or sold. Creditors often ask for an asset that has not yet been provided to a third party as a guarantee.
How to proceed
A mortgage is a right in rem which involves immovable assets allocated to discharge an obligation, in this case, the repayment of a loan.
If a property has to be mortgaged, a mortgage registration deed has to be drawn up before a notary. The notary is responsible for checking if the property is already mortgaged. If it is, the bank, as mortgagee, shall not obtain first rank registration (preferential right which allows the creditor to be paid first in the event of default) and may refuse to grant the loan. The notary is responsible for registering the mortgage and recording it in the Mortgage Registry (Bureau des hypothèques).
The customer is entitled to keep and use the asset. There is therefore no dispossession of the immovable asset that is mortgaged.
Examples: it is possible to mortgage land to be built on or not, constructions, even uncompleted or in the planning stages, off-plan property to be completed in the future (only if the building permit has been granted), rights of usufruct, leasehold rights and rights of superficies.
Although, in principle, the mortgage constitutes a valid guarantee for the bank (valued between 50 % and 80 % of the value of the asset), it nevertheless represents a costly guarantee for the customer because of the costs it involves.
A pledge is a contract whereby a debtor provides a tangible or intangible movable asset to a creditor as a guarantee. The pledge must be recorded by a public or private deed. In the case of the pledging of intangible movable assets, the pledge is served and accepted either by notarial deed or private deed.
Example: the asset provided by way of guarantee can be a tangible movable asset (such as transferable securities, machinery, raw materials, goods, vehicles) or an intangible asset, represented by a lien (such as an invoice, commercial papers, insurance policies).
The debtor remains the owner of the pledged asset. As the owner, the debtor is entitled to use the pledged asset and even sell it. However, the creditor has a right of retention over the pledged asset and also a preferential right allowing it to be paid first if the asset is sold.
Types of pledge (not exhaustive):
Pledging of transferable securities
The pledging of transferable securities is a very attractive guarantee, both for the bank (few administrative formalities) and for the debtor (no or few costs). For valuation reasons, banks only accept, as a pledge, securities which are listed on a stock exchange and which have good liquidity. In addition, as the securities listed on a stock exchange can experience significant price fluctuations, the banks apply a hedging coefficient to the different types of securities. Securities are generally pledged by a private deed drawn up between the debtor and the creditor. The securities in question are blocked in a securities account held at the creditor bank.
Pledging of goods
As with securities, only goods or raw materials which have a value that can be determined because they are quoted on organised markets (for example oil, energy, certain metals, sugar or coffee) are pledged.
Pledging of cash
With the pledging of cash, valuation is not an issue (at least if the currency is the same as that of the loan to be covered). As with the pledging of transferable securities, a pledge agreement is signed between the debtor and the creditor and a clearly defined amount is blocked on a specific account or deposit account held at the creditor bank.
Pledging of business assets
This is the pledging of the customer base, trade name, brands and/or patents, lease rights, movable assets, goods and road vehicles. This type of pledge is considered to be unpredictable because of the fluctuating value of the elements that it includes and the difficulty in monitoring it. The banks therefore only assign a low guarantee value to it.
Although it must be registered in the Mortgage Register to be enforceable on third parties, the pledging of business assets is still less costly than a mortgage.
Pledging of receivables
The debtor’s receivables constitute intangible assets. The value of this type of guarantee depends on the debtor’s solvency, the reality and the transferability of the receivable and its recoverability. If it is pledged, the receivable remains part of the pledgor’s assets. The bank does not become the owner of the receivable, but has a preferential right over it. It also maintains a right of recourse against the pledgor, who is still its primary debtor.
Pledging of commercial papers
The drawer of a commercial paper (creditor) has two options when it comes to exercising their right:
- either they need the money straight away and have the commercial papers discounted by their bank;
- or they keep the commercial papers in their portfolio until the due date of the bill in question.
The commercial papers which the drawer keeps in their portfolio can be used to improve the business' liquidity by pledging them to the bank in exchange for loans granted.
Assignment of an insurance policy
There is a wide range of insurance policies which cover different aspects and which can be taken out to limit the risks incurred by the business:
- endowment insurance (lump sum payable on maturity of the policy if the insured is still alive);
- life insurance (lump sum payable on the death of the insured);
- loan protection insurance or assurance solde restant dû (lump sum corresponding to the insured’s debt at the time of his/her death);
- key person insurance (insurance covering the death or permanent disability of the business manager);
- fire insurance (insurance covering damage caused by fire);
- business interruption insurance (insurance covering an accident preventing the continuation of operations for a certain amount of time. These costs are not, in principle, covered by fire insurance);
- credit insurance (insurance covering the loss arising from the insolvency of customers).
The cover provided under all these insurance policies can be assigned to the bank. Assigning an insurance policy to the bank is done by simple private deed, normally by an addendum signed by the bank, the policyholder and the insurance company, in which the three parties agree on the rights allocated and the procedure to be complied with.
Endorsement of invoices
The majority of receivables can be assigned or pledged by simple endorsement of the invoice. Endorsement in favour of the bank has the effect of rendering the pledge enforceable on third parties and allowing the bank itself to demand payment from the debtor.