- Why should security be needed for bank borrowing or other financing?
- Are there specific types of funding you would need to consider security for?
- What types of security can be provided?
- Can the value of the security be limited to less than the total amount borrowed?
- What is the process for providing security?
- What are the costs involved in providing security?
- How long does it take to get funding if security is needed?
- Who needs to provide the security?
- Can another company or individual give a guarantee?
- Does the security we have given need to be revalued each year?
- What happens when we no longer have any borrowing facilities?
- Can the security we have provided be removed before the lending is fully repaid?
- When will the bank call on the security if we are in financial difficulty?
- Do I need to take legal advice before giving security personally?
- Can I limit my liability to a several liability, as opposed to being joint and severally liable for the repayment of borrowing?
- How will giving security for the firm’s borrowings affect my personal ability to borrow money?
- What happens if I want to move house, or sell the property which is held as security?
- How do I use my home as security if it is jointly owned?
David Newbury, a Lloyds Bank Commercial Banking relationship director who specialises in the legal sector, answers the most common questions he is asked by firms about providing security for bank borrowings. (1 July 2019)
1. Why should security be needed for bank borrowing or other financing?
For any lender, it comes down to risk versus reward. If the borrowing is above the lender’s comfort level, security will be considered; such as when the borrowing is higher than the individual’s capital in the business, when 100% funding is requested, or when the trading history of the business is not strong.
A bank can offer better interest rates if security is provided and the risk is reduced.
2. Are there specific types of funding you would need to consider security for?
When funding property purchases, banks take a security in the form of a legal charge over the property.
Similarly, ‘asset finance’ – for physical items such as vehicles, IT and other equipment – is secured against the items themselves.
Security is a consideration for any commercial loan or overdraft. The need for security will reflect the reason for the funding, the quality of the application, and the financial performance and plans of the borrower.
3. What types of security can be provided?
Potential options would be a law firm’s premises; the houses of the partners/owners; a sum of cash; investments in stocks and shares (quoted shares, unit trusts and government stocks only); life policies with profits; unit-linked life policies; or physical assets such as vehicles. All of these can potentially be used as security against particular types of lending.
Firms that have incorporated can also provide a debenture (a general charge over the assets of the firm, including debtors) and personal guarantees from the directors or owners of the firm.
4. Can the value of the security be limited to less than the total amount borrowed?
In short, yes. Depending on the risk profile of the borrowing firm, a bank can lend a combination of secured and unsecured lending.
5. What is the process for providing security?
Where property is used as security, an independent valuation will usually be conducted by a surveyor chosen by the borrower from the bank’s panel of valuers. Your firm will usually appoint independent solicitors to act for you in the matter, although in some cases your firm’s own solicitor may be able to act for you – this is worth checking with the lender.
The lender will send out security documentation for your solicitor to complete. Once the solicitor has done the necessary searches, put the legal charges in place, and provided the ‘report on title’ to the bank, the bank will release the funds.
If you are buying a property in the name of one company and then granting a lease of that property to your firm, this is known as OPCO/PROPCO (an operating company/property company deal). Separate legal representation may be required, using the lender’s panel solicitors, which means increased fees for the process as a whole.
The process and documentation is simpler for security such as a debenture, or a charge over stocks and shares, a life policy or cash. Stocks and shares will require a valuation based on current market prices.
On completion, the lender will register any charges. Thereafter, the security cannot be released without the lender’s agreement.
Personal guarantees are likely to require the borrower to take independent legal advice before completion, but this can be waived for smaller amounts of borrowing.
6. What are the costs involved in providing security?
Each lender is likely to have their own set charges for each type of security. At the outset, establish what these charges are and whether there is any scope for reducing them. Property security will be the most expensive to set up.
Here are some approximate figures for potential charges:
- Property: Lender fee £300, plus solicitor fees to be agreed directly with the solicitor.
- Cash: £100-£150.
- Stocks/Shares: £150-£200.
- Life policy: £75-£125.
- Personal guarantee: £100-£150.
- Debenture: £150-£200.
7. How long does it take to get funding if security is needed?
This depends on the complexity of the situation. Straightforward security such as cash, stocks and shares, life policies, personal guarantees, and a debenture, might take a couple of weeks.
Using property as security might take 4-6 weeks, depending on requirements of the solicitors and the nature of the property. For example, using a lease as security will take longer than freehold, as more parties need to provide their consent.
These timescales are in addition to the timescales for the borrowing application itself, and the information gathering for this, all of which will again reflect the complexity of the situation.
8. Who needs to provide the security?
If the lending is to a sole trader or a standard partnership of named individuals, the individuals provide the security.
For firms with a corporate structure (a limited liability partnership, or a limited company) the directors or beneficial owners or shareholders usually provide the security.
9. Can another company or individual give a guarantee?
Another company within the same ownership as the borrowing firm may be able to provide a cross company guarantee, although there needs to be a beneficial link between the two businesses and a valid business reason for providing such a guarantee.
When lending to law firms, lenders will only accept personal guarantees that have been provided by the directors or beneficial owners of the firm.
10. Does the security we have given need to be revalued each year?
Property given as security requires a valuation before completion. Unless there is a significant change in the property market or in the business performance of the firm, or further lending is required, it is unlikely that a revaluation would be requested.
When a firm provides stocks and shares as security, it is common to provide annual revaluations based on the current market prices. As with property, if there is a significant change in value a change to the security may need to be considered.
Other security options, such as cash, life policies and personal guarantees, do not require annual valuations.
11. What happens when we no longer have any borrowing facilities?
Once the borrowing has been repaid, the security will usually be released. You should check with the lender that this is the case.
If additional support is likely to be needed in the near future, you may make the decision to keep the security in place with the lender. This avoids the costs associated with putting it back in place at a later date.
12. Can the security we have provided be removed before the lending is fully repaid?
This is something to discuss with the lender both at the outset and at each annual review. There may be a level at which the lender would be comfortable to reduce or remove the security prior to the borrowing being fully repaid by your firm.
13. When will the bank call on the security if we are in financial difficulty?
It is not uncommon for some law firms to get into financial difficulty from time to time, perhaps due to a bad debt, or money being tied up in lengthy matters, or a downturn in one or more areas of business.
The lender’s first priority will be to work closely with the firm to understand the situation. How did the difficulties arise? Did the firm approach the bank as early as possible to warn of difficulties ahead, or was the problem hidden until the bank noticed the tell-tale signs in the bank account transactions? What is the firm doing to address the problem?
The next stage is to work out a solution with the firm. This could include working closely with a specialist support manager from the bank as well as your relationship manager.
In some cases the recovery plan is unsuccessful and loan repayments fall into arrears and cannot be rectified. In this situation, after everything has been considered, the next step may well be a recovery process. This may involve the sale of an asset held as security.
The timescales for all of these stages will vary between cases.
14. Do I need to take legal advice before giving security personally?
A bank will always recommend that independent legal advice is taken before giving any security. This is especially true if the asset is jointly owned, in which case independent legal advice should be provided to all parties involved.
In some circumstances, a lender may agree that such advice can be provided by a solicitor within the borrower’s own firm.
15. Can I limit my liability to a several liability, as opposed to being joint and severally liable for the repayment of borrowing?
In some circumstances, such as a loan to an incorporated company that is secured by a debenture and personal guarantees provided by multiple directors and owners, this may be possible. Rather than joint and several liability, the lender may divide the total amount between the guarantors — limiting each person’s liability to their share of the borrowed amount.
When lending to law firms it is normal practice for the lender to seek joint and several guarantees. Each guarantor is fully responsible equally for the borrowed amount — so if one person defaults, the rest of the guarantors between them must provide the money that is owed to the lender.
16. How will giving security for the firm’s borrowings affect my personal ability to borrow money?
If you have provided security against your personal property, this may adversely affect your ability to raise further mortgage borrowings. A mortgage lender will require a first charge on the property, as security for the new mortgage, and will ask for a deed of priority from the lender to the law firm.
If the equity on the property is substantial in comparison to the combined amount of the borrowings, this may not be a problem. But if the new mortgage adds significant risk to the lender, they are unlikely to agree to the deed of priority unless alternative security is provided.
Other types of security, such as cash, life policies and personal guarantees, are highly unlikely to affect your ability to borrow personally. Ask the lender for their views on this issue, given the security that you are providing.
17. What happens if I want to move house, or sell the property which is held as security?
If security is still required to support your lending, you should be able to ‘port’ (move) the legal charge over to your new property, following the same process as for the original security. However, if the value of the new property is lower than the original one, or if you are seeking a higher level of borrowing, then there may not be sufficient security for the lender.
If you are selling but not buying, and wish to maintain the funding, the property security can usually be replaced by a charge over the cash from the sale.
Ask the lender to confirm their requirements and the process at an early stage of the discussions.
18. How do I use my home as security if it is jointly owned?
If the property is jointly owned and one of the parties is not linked to the borrowing, that party will need to agree to the arrangement by a ‘postponement of interest’ document for the property for the agreed level of borrowing. Independent legal advice will be required for all the joint owners.
The borrower will also need to authorise the lender to disclose financial information about the transaction to the non-borrowing party as well as their solicitors.