Security And Margin

There is also the question of security that is provided by a borrower when a term loan is taken. This has to be done in several layers in order to satisfy the banks that there is enough backup for them in case the borrower fails to repay the loan.

In the first instance, there has to be a hypothecation of the current assets of the business with the bank. This will include items like stock and other current assets. It will have to be accompanied by the hypothecation of the fixed assets that include buildings, land and other similar assets actually owned by the business.

Once the loan crosses a certain minimum figure, which can be in the range of Rs. 5 lakh-Rs. 7 lakh, it requires collateral. Collaterals are specific assets to be pledged by the borrower and will yield some amount for the lender in terms of recovery of the loan if required. There will also have to be a personal guarantee and, if required, a third party guarantee, depending upon the amount of the loan and the terms and conditions involved.

Another condition is that a margin will be maintained by the bank. This is in the range of 15%-25% though in many cases it moves towards the higher end of the band. The margin means that the specified amount has to be financed by the borrower. In case of a 25% margin, the bank will provide a loan up to 75% of the purpose concerned and the remaining amount will have to be raised by the borrowers themselves. This ensures that there is some initial contribution coming in from the borrowers for the activities involved.