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Preparing security/collateral for bank loan: Domiciliation

Jun 22, 2017
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AT last we are delivering the last parts of this long series on how to prepare security/ collateral for business loan.

In this concluding part we are lumping three inter-related elements of security/ collateral, viz, Domiciliation, Assignment of contract proceeds and Assignment of Book Debts. This last part would however be treated in two sub-parts. We also note that our last week’s discuss centered on a similar mode of security where cash is involved, and cash equivalent in this concluding part.

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Domiciliation means the borrower pledged or mortgages his income or funds inflow in favour of the bank so as to ensure repayment of the loan secured by domiciliation.

In other words, the bank becomes the first reciepient/ beneficiary of the cash inflow from the domiciliated business.

This is a special type of security as it serves two purposes: first, it is a security on its own and it is also a source of repayment for the amount borrowed. To make this directive effective, borrower would be required to get whoever that is the source of the income to pay in favour of the bank up to the tune of the loan being secured or the outstanding.

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In most cases the loan is for supply of goods or execution of a contract generally described as LOP (Local Purchase Order). So while the bank loan is used to procure the goods for the supply or execute the contract, the proceed from the supply/ contract is pledged and consequently paid directly to the bank. It is assumed that after the bank has collected the full amount covered by the loan agreement the balance is for the borrower as profit.

But beyond contracts/ LPOs a domiciliation loan agreement could be executed and is also applicable to salary where the bank usually ask the borrower’s employer to sign an undertaking that the borrower’s salary will continue to be forwarded to the bank unfailingly up to the amount borrowed otherwise a legal action could be taken against the employer.  Apart from the salary, in the case of cessation of employment, benefits accruing to him will similarly be paid to the bank.

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Now the importance of bringing this last aspect of domicilIation is to link it to the next similar element of security/ collateral for business loan which is Assignment of Contract Proceeds. Assignment of Contract Proceeds is similar to domiciliation but in the case of the former the loan repayment is strictly tied to the business it is funding.

We continue this strand next week.

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