Do you have cross collaterised assets or do you know what it means?
Cross collateralisation is where your lender has taken security over more assets than those that you have financed, this may be a taking security over your home for a business loan, or taking security over your entire business for a vehicle loan. This cross collateralisation means that you are limited in dealing with these other assets as they are already pledged to your lender.
What is the consequence of cross collateralisation?
Generally a bank will attempt to take security over as many assets as possible to minimise their risk against you. This can substantially reduce your borrowing ability, but may also mean that should you need to sell assets you are limited to seeking the approval of your lender.
A simple example
Joan has borrowed $500,000 for her business secured by the business and her home, which is already mortgaged, she has $500,000 in equity in her home. She wants to sell her home and buy a new one.
She goes to sell her home.
Her business lender advises her that out of the sale proceeds they require the entire balance to be transferred to the business loan, despite her having significant equity, the business lender could control the sale process.
How do I deal with cross collateralisation?
Unfortunately it is rare for your lender to allow you to release assets without providing new security or paying down significant amounts of debt. Usually the only option is to refinance your debts with a new lender, and potentially split personal debt away from business debt, even requiring two banking arrangements.
What are the risks of cross collateralisation?
If you business is under pressure, your personal assets may be used to support the business debts, even if this is not your intention. Equally if you are looking to liquidate assets you may not be able to control the sale process.
What should I do if I am concerned about cross collateralisation?
Our approach is understand your overall lending position and then work out a plan to reduce the cross collateralisation. Often times this is a discussion that was not had at the time of borrowing the money initially.
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