Securing Advances-No Transfer of Ownership or Possession

Figuring out the best way of securing long-term and short-term funds from financial institutions is what many business owners and entrepreneurs think about. Let us be frank here that there are a times when your business runs out of working capital and you have to think of the ways you're going to raise the amount of money you need to keep your business running.

Most business owners and online entrepreneurs prioritize borrowing from banks. Do you also secure advances from banks? If your answer is yes, then you must have noticed that banks have got strong credit practices. They do this in order to ensure safety of their funds and shareholders' funds too.

Many businesses have disappeared and never to return to the market just because of loans. They ended up being in huge debts because of:

1.) Wrong decisions.

2.) Wrong purpose.

Now you're asking me, "What about the wrong decisions and the wrong purpose?"

You see, the wrong decision is when you approach a financial institution and apply for the wrong type of loan. The one that is not compatible with your business. Another wrong decision is when a business borrows beyond its capacity to pay the loan.

The wrong purpose is when you apply for a business loan and use it for other purposes. You start paying for your college fee and other personal expenditures.

Have you ever thought of or heard about hypothecation? I recall our lecturer taking us through this topic and that has made me reminisce about it today. He spoke of two terms, namely:

1.) The hypothecator.

2.) The hypothecatee.

The professor went further lecturing to the class that the hypothecator is the borrower while the lender is the hypothecatee.

To define hypothecation, Hart says, "Where property is charged with the amount of a debt, but neither ownership nor possession is passed to the creditor, it is said to be hypothecated." I consider it the best mode of securing advances from a bank.

If you assign stock in your business or raw materials which are still under process as collateral to the hypothecatee, then you're able to dispose or use the same in any way you like. As a borrower, you execute a document called a 'Letter of hypothecation' or 'hypothecation deed.' This document favours the lender. The letter of hypothecation or hypothecation deed provides that the hypothecatee has the power to take the property assigned as collateral if you fail to service the loan.

Did I say that the hypothecatee takes the property? Yes, now the hypothecation is becoming more of a pledge. In fact, there is no difference between it and a pledge once the hypothecatee exercises this power.

The hypothecatee will be paying periodic visits to your business premises in order to assess the stock. Also there will be a hypothecation notice displayed on your stock so as to ensure that you do not create a charge of the same to another lender.

However, note that under this method of securing advances, you're only allowed to part with the stock through sale or manufacturing. The value of such stock sold or manufactured as ascertained by the hypothecatee should be replaced or otherwise proceeds be paid to the hypothecatee.