What is a collateral agreement

what is a collateral agreement

Other People Are Reading

Definition

In a cash collateral agreement, a borrower agrees to put money in a bank account or trust fund as a financial guarantee, enabling the lender to periodically withdraw cash from that account to repay the loan. In essence, cash in the collateral account no longer belongs to the debtor. For example, a bank consents to a $1 million secured loan with a company and asks top leadership to post collateral in the form of a long-term asset, short-term resource or cash. Senior management decides it's strategically sensible to use cash rather than equipment, and then directs corporate treasurers to transfer $1 million into a newly created special-purpose account. During the loan amortization period, money will come out of this account to repay the debt.

Significance

Lenders generally delight in the financial flexibility and risk management relevance of cash collateral agreements because they provide peace of mind on the default front. In essence, creditors can't lose in a cash collateral funding arrangement because they can always seize money from defaulting borrowers' accounts to make themselves whole. Typically, a lender may opt for a secured loan when interacting with

a new corporate client, monitoring the organization's account over time to see whether it passes muster with respect to things such as conformity to repayment schedules, faithfulness to loan covenants and overall financial soundness.

Expert Guidance

For a company, opening a banking account and using it in a cash collateral agreement are part of top leadership's strategies to fund operating activities, whether they relate to mundane initiatives or long-term investments. If the organization's top brass isn't sure about the best financing option to use, professionals such as funding consultants and investment bankers can lend their expertise and weigh in on funding discussions. They typically review a company's financial profile, determine how much is coming in corporate coffers and how much is going out, familiarize themselves with operating goals and propose the best funding option to help senior management steer the business to success.

Personnel Involvement

Accountants, corporate treasurers, financial managers and investment analysts help an organization in funding initiatives, especially with secured debt arrangements such as cash collateral agreements and financial guarantees. Corporate attorneys, regulatory compliance specialists and budget supervisors also contribute their acumen to make cash-funded loan agreements a success.

Source: ehow.com

Category: Credit

Similar articles: