個(gè)人及商業(yè)信貸課件

PersonalandCommercialLending

FangMing（方明）027－TeachingContentsPersonalandCommercialLending:AnIntroductionPersonalandCommercialLending:AdvancedThisUnitisdesignedtoenablecandidatestounderstandtheprinciplesandproductsthatapplywhenlendingtopersonalandcommercialborrowers.Itpreparesthecandidateforpracticallendingsituationsthatwouldariseinthebankingandrelatedfinancialservicesindustriesandisrelevanttocandidateswithnoexperienceortothosewhohavealimitedexperienceinlending.UnitpurposeSection11ImportanceofLendingpracticeMainsourceprofitoffinancialinstitutionsRiskofnonpaymentFundsentrustedtoafinancialinstitutionbydepositors-principalandagentrelationship,moralhazardResponsibilitytoprotecttheinvestmentofshareholdersoffinancialinstitutionsLegalimplications2Asystematicapproachtolending2.1IntroductionstageNon-customersExistingcustomers2.2Theapplicationform2.3ReviewingtheapplicationCAMPARICCCPARTSPARSERS2.4Evaluation2.5MonitoringandContol1.2AmountandpurposeFiscalorgovernmentdirectives,orstrategicreasonPersonalcustomer-theabilitytorepaytheloanBusinesscustomer-supportingevidence1.3RepaymentNatureoftheloanandinterest1.4Safetyshortandmedium-termpersonalborrowingisunsecuredMaindangertotherepaymentbyregularsalaryisredundancyandillness1.5ExpediencyOccasionallydecisionsonlendingaremadethatdonotalwaysfollowanexpectedpattern1.6RemunerationInterestCommission1.7Selling3.ImportanceofsourceandtimingofincomeinrelationtopersonallendingSalaryOvertimepayments,bonuses,commissionsTimingoflending

Section35.3.1RestrictionsonlendingLegalrestrictionsCreditratingrestrictionsThelender’spolicy5.3.2AdditionalFactorsRelatingtoPersonallending

lendingtojointapplicantslendingtoyoungpersonslendingtotrusteeslendingtoexecutors

2MethodsofdeliveryDirectsalesPostallendingElectronicsaleRegulatoryaspectsofloansalesSection45.4.1TheproductsShort-termborrowinga.Overdraftfeaturesofoverdraftsb.creditcardfeaturesofcreditcard5.4.2Medium-termborrowingPersonalloansSecuredpersonalloansStudentsLoansGraduates/OverdraftsCareerDevelopmentLoansExecutorLoansRepaymentmethodsThetwomainwaystorepayyourmortgageare'repayment'and'interestonly'.Witharepaymentmortgageyoumakemonthlyrepaymentsforanagreedperiod(the'term')untilyou'vepaidbacktheloanandtheinterest.Withaninterestonlymortgageyoumakemonthlyrepaymentsforanagreedperiodbutthesewillonlycovertheinterestonyourloan(endowmentmortgagesworkinthisway).

You'llnormallyalsohavetopayintoanothersavingsorinvestmentplanthat'llhopefullypayofftheloanattheendoftheterm.

MortgagetypesCapitalandinterestmortgagesInterest-onlyrepaymentmortgages5.5.2OtherloansBridgingloansInterestandInterestRatesSomebasicinformationoninterestratesBankofEnglandbaserateSetbyMonetaryPolicyCommitteeProvidesabasisforotherratesNo-onecantradeatalowerrate(arbitrage)ObjectivesoftheMPCTocontroltherateofinflation(targetband)IncreaseininterestratereducesdemandReductionininterestratestimulatesdemandBasedecisionsoneconomicdataOtherImportantRatesLIBOR:LondonInterbankOfferedRateTherateatwhichbanksarewillingtolendtoeachotherThebasisformanyfinancialcalculationsMortgageratesMortgagesarethesafestformoflendingtoindividualsohavelowestinterestratesMarketrateisdeterminedbycompetitionbetweenlendersCompoundingIntervalNowconsiderwhathappensifwecompoundinterestmorefrequentlyIfevery6months,thenrateof10%forayearbecomes5%forsixmonthssoIfcompoundedevery3monthsThegeneralformulaforinterestatratercompoundedmtimesayearforn

yearsonaloanofLisContinuousInterestContinuousinterestisthelimitofmorefrequentcompounding:

FrequencyRepaymentCostof￡100at10%Annually(m=

1)110Semi-annually(m=2)110.25Quarterly(m=4)110.38Monthly(m=12)110.47Weekly(m=52)110.51Daily(m=365)110.52Continuous(m=)110.52EffectsThedifferencebetween￡110and￡110.52mayseemsmallItisequivalentto0.52%ontheannually-compoundedinterestrateof10%OnalargeloanthiscouldbesignificanteffectCompoundingperiodMattersforrepaymentNeedstobeclarifiedbeforealternativeloanscanbecomparedFlatRateInterestInterestcanalsobequotedasaflatrateConsider￡100borrowedfor5years,withaflatrateofinterestof10%

Thismeans￡10ofinterestispaidperyearOver5yearsthetotalpaymentsontheloanare

￡10+￡10+￡10+￡10+￡10+￡100=￡150Therepaymentstructureis5paymentsof￡30ThisisequivalenttoanAPRof15.2%(seelaterorusemortgagecalculation)AnnualPercentageRateThesecompoundingissuesmotivatetheneedtofindastandardofcomparisonThegovernmenthaschosentousetheAnnualPercentageRate(APR)Thisinterestrateconvertsanyinterestschedule(suchastheflatrate)totheannualequivalentAnnualPercentageRateAnnualPercentageRateConsiderreceivingmpaymentsAkattimestkandmakingnpaymentsAk′attimestk′TheinterestratethatmakesthepresentdiscountedvalueofbothflowsequalsolvesThesolutionrtothisequationistheAPRExample1Receive￡100att1=0Pay￡10att1′=1,pay￡110att2′=2Solutionisr=10%Thisisjustastandardloanat10%interestExample2Receive￡100att1=0,receive￡50att2=1.5Pay￡90att1′=1,pay￡80att2′=2Solutionisr=13.5%Howisthisfound?DrawagraphTrialanderrorExample2Example3Flatrateinterestof10%

￡100isreceivedattime0Fivepaymentsof￡30aremadeTheAPRsolvesThesolutionis15.2%asclaimedearlierExample3ComparisonTheAPRisquotedwithalladvertsforloansItisasimplemeansofcontrastingtheratesonloanswithdifferentstructures5.6.2CreditscoringScorecardsAdvantagesofScorecardsBehavioralscoring5.6.3TheuseofexternalcreditreferenceSection75.7.1Theneedforsecurity5.7.2Typesofsecurity5.7.3securitymargin1.cash2.land3.securities4.lifepolicies5.thirdsecurity6.SecuritytakenagainstanirrevocablemandateSection85.8.1ProtectionproductsTheneedforprotection1.Loanrepaymentinsurance2.Lifeassurances3.BuildingsandcontentsinsuranceSection95.9.1CommercialLendingLendingtocommercialcustomerstakethesamelendingprinciplesaspersonallendingMorefinancialinformationbeforemeetingCarefulconsiderationofcommerciallending

ThebusinessplanExecutiveSummaryMarketAnalysisCompanyDescriptionOrganizationandManagementMarketingandSalesStrategyServicesandProductsFunding(Financing)RequirementsFinancialInformationAppendicesSection105.10.1RestrictionsonLendingtoBusinessesRestrictionson:ThetypesofloansThetypesofcustomersBorrowerLegalRestrictions5.10.2FinancialinformationItistoassessthetruefinancialposition,operatingperformanceandcashflow.Oneimportantinformationsource:BankRecordsIncluding:Turnover(Revenue)BankbalancesStandingorderanddirectdebitsDetailsofunpaiditemsCharges5.10.3BusinessStructureSoletrader(Singleproprietorship)PartnershipLimitedcompanySection115.11.1TheManagementTeamThesuccessorfailureofabusinessoftencomesdowntothequalityofthemanagementteam.Sothestrengthsandweaknessesofthemanagementteam.5.11.2TheUseofAnnualAccountsThechairman’sstatementThedirectorsreportTheprofitandlossaccountAbalancesheetThecashflowstatementAuditor’sreportNotestotheaccountsAsatementoftotalrecognisedgainsandlossesSection125.12.1ManagementAccountsAlternativeinformationsourcetothebalancesheetandaprofitandlossaccount.FormanagementdecisionmakingandwithnogenerallyacceptedprinciplesThemainemphasisofmanagementaccountsisinprovidinguseful,timely,detailedandresonablyaccurateinformationfordecision-makingTotaketheindividualpartsordivisionsofabusinessasobjectsratherthanthewholebusiness5.12.2ProfitBudgetsandCashFlowForecastsItisanestimateofthefutureprofitreturnsfromfuturetrading.Cashflowforecast:futureexpenditure,incomeandshortfallfinancingItisbasedontheshortandlonger-termobjectives.ElementsofFinancialPlanningInvestmentinnewassets–determinedbycapitalbudgetingdecisionsDegreeoffinancialleverage–determinedbycapitalstructuredecisionsCashpaidtoshareholders–dividendpolicydecisionsLiquidityrequirements–determinedbynetworkingcapitaldecisionsRoleofFinancialPlanningExamininginteractions–helpsmanagementseetheinteractionsbetweendecisionsExploringoptions–givesmanagementasystematicframeworkforexploringitsopportunitiesAvoidingsurprises–helpsmanagementidentifypossibleoutcomesandplanaccordinglyEnsuringFeasibilityandInternalConsistency–helpsmanagementdetermineifgoalscanbeaccomplishedandifthevariousstated(andunstated)goalsofthefirmareconsistentwithoneanotherFinancialPlanningModelIngredientsSalesForecast–manycashflowsdependdirectlyonthelevelofsales(oftenestimatedusingagrowthrateinsales)ProFormaStatements–settinguptheplanasprojectedfinancialstatementsallowsforconsistencyandeaseofinterpretationAssetRequirements–howmuchadditionalfixedassetswillberequiredtomeetsalesprojectionsFinancialRequirements–howmuchfinancingwillweneedtopayfortherequiredassetsPlugVariable–managementdecisionaboutwhattypeoffinancingwillbeused(makesthebalancesheetbalance)EconomicAssumptions–explicitassumptionsaboutthecomingeconomicenvironmentExample:HistoricalFinancialStatementsGourmetCoffeeInc.BalanceSheetDecember31,2001Assets1000Debt400Equity600Total1000Total1000GourmetCoffeeInc.IncomeStatementForYearEndedDecember31,2001Revenues2000Costs1600NetIncome400Example:ProFormaIncomeStatementInitialAssumptionsRevenueswillgrowat15%(2000*1.15)AllitemsaretieddirectlytosalesandthecurrentrelationshipsareoptimalConsequently,allotheritemswillalsogrowat15%GourmetCoffeeInc.ProFormaIncomeStatementForYearEnded2002Revenues2,300Costs1,840NetIncome460Example:ProFormaBalanceSheetCaseIDividendsaretheplugvariable,soequityincreasesat15%Dividends=460NI–90increaseinequity=370CaseIIDebtistheplugvariableandnodividendsarepaidDebt=1,150–(600+460)=90Repay400–90=310indebtGourmetCoffeeInc.ProFormaBalanceSheetCase1Assets1,150Debt460Equity690Total1,150Total1,150GourmetCoffeeInc.ProFormaBalanceSheetCase1Assets1,150Debt90Equity1,060Total1,150Total1,150PercentofSalesApproachSomeitemstendtovarydirectlywithsales,whileothersdonotIncomeStatementCostsmayvarydirectlywithsalesIfthisisthecase,thentheprofitmarginisconstantDividendsareamanagementdecisionandgenerallydonotvarydirectlywithsales–thisaffectstheretainedearningsthatgoonthebalancesheetBalanceSheetInitiallyassumethatallassets,includingfixed,varydirectlywithsalesAccountspayablewillalsonormallyvarydirectlywithsalesNotespayable,long-termdebtandequitygenerallydonotbecausetheydependonmanagementdecisionsaboutcapitalstructureThechangeintheretainedearningsportionofequitywillcomefromthedividenddecisionExample:IncomeStatementTasha’sToyEmporiumIncomeStatement,2001%ofSalesSales5,000Costs3,00060%EBT2,00040%Taxes(40%)80016%NetIncome1,20024%Dividends600Add.ToRE600Tasha’sToyEmporiumProFormaIncomeStatement,2002Sales5,500Costs3,300EBT2,200Taxes880NetIncome1,320Dividends660Add.ToRE660AssumeSalesgrowat10%DividendPayoutRate=50%Example:BalanceSheetTasha’sToyEmporium–BalanceSheetCurrent%ofSalesProFormaCurrent%ofSalesProFormaASSETSLiabilities&Owners’EquityCurrentAssetsCurrentLiabilities

Cash$50010%$550

A/P$90018%$990

A/R2,000402,200N/P2,500n/a2,500

Inventory3,000603,300

Total3,400n/a3,490

Total5,5001106,050LTDebt2,000n/a2,000FixedAssetsOwners’Equity

NetPP&E4,000804,400

CS&APIC2,000n/a2,000TotalAssets9,50019010,450

RE2,100n/a2,760

Total4,100n/a4,760TotalL&OE9,50010,250Example:ExternalFinancingNeededThefirmneedstocomeupwithanadditional$200indebtorequitytomakethebalancesheetbalanceTA–TL&OE=10,450–10,250=200ChooseplugvariableBorrowmoreshort-term(NotesPayable)Borrowmorelong-term(LTDebt)Sellmorecommonstock(CS&APIC)Decreasedividendpayout,whichincreaseAdd.ToREExample:OperatingatLessthanFullCapacitySupposethatthecompanyiscurrentlyoperatingat80%capacity.FullCapacitysales=5000/.8=6,250Estimatedsales=$5,500,sowouldstillonlybeoperatingat88%Therefore,noadditionalfixedassetswouldberequired.ProformaTotalAssets=6,050+4,000=10,050TotalLiabilitiesandOwners’Equity=10,250ChooseplugvariableRepaysomeshort-termdebt(decreaseNotesPayable)Repaysomelong-termdebt(decreaseLTDebt)Buybackstock(decreaseCS&APIC)Paymoreindividends(reduceAdd.ToRE)IncreasecashaccountGrowthandExternalFinancingAtlowgrowthlevels,internalfinancing(retainedearnings)mayexceedtherequiredinvestmentinassetsAsthegrowthrateincreases,theinternalfinancingwillnotbeenoughandthefirmwillhavetogotothecapitalmarketsformoneyExaminingtherelationshipbetweengrowthandexternalfinancingrequiredisausefultoolinlong-rangeplanningTheInternalGrowthRateTheinternalgrowthratetellsushowmuchthefirmcangrowassetsusingretainedearningsastheonlysourceoffinancing.TheSustainableGrowthRateThesustainablegrowthratetellsushowmuchthefirmcangrowbyusinginternallygeneratedfundsandissuingdebttomaintainaconstantdebtratio.DeterminantsofGrowthProfitmargin–operatingefficiencyTotalassetturnover–assetuseefficiencyFinancialleverage–choiceofoptimaldebtratioDividendpolicy–choiceofhowmuchtopaytoshareholdersversusreinvestinginthefirmSection135.13.1FinancialAppraisalThreemainareas(limitedinHNDtextbooks)FinancialstructureLiquidityProfitabilityFinancialstructure(Gearing)Assets(Capitalthatisinjectedintothebusiness)=Equity+DebtTherelationshipbetweenequityanddebtisimportant,whichdecidestheborrowingpotentialandtheablitytorepaythecommercialloans.CapitalgearingratioCapitalGearingRatio=Liability/Owner’equityAninvestmentratiothatcomparestheborrowingmadebyacompanywiththefinancecontributedbytheshareholders.Capitalgearingratioismainlyusedtoanalyzethecapitalstructureofacompany.Thetermcapitalstructurereferstotherelationshipbetweenthevariouslong-termformoffinancingsuchasdebentures,preferenceandequitysharecapitalincludingreservesandsurpluses.Leverageofcapitalstructureratiosarecalculatedtotestthelong-termfinancialpositionofafirm.Capitalgearingratioisimportanttothecompanyandtheprospectiveinvestors.Itmustbecarefullyplannedasitaffectsthecompany'scapacitytomaintainauniformdividendpolicyduringdifficulttradingperiods.Itrevealsthesuitabilityofcompany'scapitalization.InterestCoverRatioItisimportanttopaytheinterestlendingonanylending.InterestCoverageRatio=NetProfitBeforeInterestandTax/FixedInterestCharge

Interestcoverratioisalsoknownasdebtserviceratioordebtservicecoverageratio.Thisratiorelatesthefixedinterestchargestotheincomeearnedbythebusiness.Itindicateswhetherthebusinesshasearnedsufficientprofitstopayperiodicallytheinterestcharges.Itiscalculatedbyusingtheaboveformula.Theinterestcoverageratioisveryimportantfromthelender'spointofview.Itindicatesthenumberoftimesinterestiscoveredbytheprofitsavailabletopayinterestcharges.Itisanindexofthefinancialstrengthofanenterprise.Ahighdebtserviceratioassuresthelendersaregularandperiodicalinterestincome.ButtheweaknessoftheratiomaycreatesomeproblemstothefinancialmanagerinraisingfundsfromdebtsourcesLiquidityThetrueliquidityreferstotheabilityofafirmtopayitsshorttermobligationsasandwhentheybecomedue.Thetwocomponentsofliquidityareliquidassetsandliquidliabilities.Liquidassetsnormallyincludecash,bank,sundrydebtors,billsreceivableandmarketablesecuritiesortemporaryinvestments.Inotherwordstheyarecurrentassetsminusinventories(stock)andprepaidexpenses.Inventoriescannotbetermedasliquidassetsbecauseitcannotbeconvertedintocashimmediatelywithoutalossofvalue.Inthesamemanner,prepaidexpensesarealsoexcludedfromthelistofliquidassetsbecausetheyarenotexpectedtobeconvertedintocash.Similarly,Liquidliabilitiesmeanscurrentliabilitiesi.e.,sundrycreditors,billspayable,outstandingexpenses,shorttermadvances,incometaxpayable,dividendspayable,andbankoverdraft(onlyifpayableondemand).Sometimebankoverdraftisnotincludedincurrentliabilities,ontheargumentthatbankoverdraftisgenerallypermanentwayoffinancingandisnotsubjecttobecalledondemand.Insuchcasesoverdraftwillbeexcludedfromcurrentliabilities.AssetsLiabilityFundingtrendsProfitabilityGrossProfitMarginWhatremainsfromsalesafteracompanypaysoutthecostofgoodssold.Toobtaingrossprofitmargin,dividegrossprofitbysales.Grossprofitmarginisexpressedasapercentage.Forexample,ifacompanyreceives$25,000insalesanditscostofgoodssoldwere$20,000,thegrossprofitmarginwouldbeequalto$25,000minus$20,000,dividedby$25,000,or20%.Basically,20%grossprofitmarginmeansthatforeverydollargeneratedinsales,thecompanyhas20centsleftovertocoverbasicoperatingcostsandprofit.NetProfitMargin

Netprofitdividedbynetrevenues,oftenexpressedasapercentage.Thisnumberisanindicationofhoweffectiveacompanyisatcostcontrol.Thehigherthenetprofitmarginis,themoreeffectivethecompanyisatconvertingrevenueintoactualprofit.Thenetprofitmarginisagoodwayofcomparingcompaniesinthesameindustry,sincesuchcompaniesaregenerallysubjecttosimilarbusinessconditions.However,thenetprofitmarginsarealsoagoodwaytotocomparecompaniesindifferentindustriesinordertogaugewhichindustriesarerelativelymoreprofitable.alsocallednetmargin.RetainedProfitTopicsCoveredExecutivePaperCorporationFinancialRatiosTheDuPontSystemFinancialPlanningGrowthandExternalFinancingExecutivePaperExecutivePaperExecutivePaperExecutivePaperExecutivePaperLeverageRatiosLeverageRatiosTotaldebt

ratio=totalliabilitiestotalassetsTimesinterestearned=EBITinterestpaymentsCashcoverageratio=EBIT+depreciationinterestpaymentsLiquidityRatiosLiquidityRatiosEfficiencyRatiosEfficiencyRatiosProfitabilityRatiosProfitabilityRatiosMarketValueRatiosMarketValueRatiosTheDuPontSystemAbreakdownofROEandROAintocomponentratios:TheDuPontSystemTheDuPontSystemassetturnoverprofitmarginTheDuPontSystemTheDuPontSystemleverageratioassetturnoverprofitmargindebtburden5.13.2BewareofCreativeAccountingCreativeaccountingandearningsmanagementareeuphemismsreferringtoaccountingpracticesthatmayfollowtheletteroftherulesofstandardaccountingpractices,butcertainlydeviatefromthespiritofthoserules.Theyarecharacterizedbyexcessivecomplicationandtheuseofnovelwaysofcharacterizingincome,assets,orliabilitiesandtheintenttoinfluencereaderstowardstheinterpretationsdesiredbytheauthors.Theterms"innovative"or"aggressive"arealsosometimesused.Thetermasgenerallyunderstoodreferstosystematicmisrepresentationofthetrueincomeandassetsofcorporationsorotherorganizations."Creativeaccounting"isattherootofanumberofaccountingscandals,andmanyproposalsforaccountingreform-usuallycenteringonanupdatedanalysisofcapitalandfactorsofproductionthatwouldcorrectlyreflecthowvalueisadded.5.13.3ImportanceoftheAccountsSection145.14.1BusinessLendingProductsAdvantagesofbuyingourightDisadvantagesofbuyingourightBusinessoverdraftsTermloansFactoringandInvoiceDiscountingDebtfactoringinvolvessellingyourinvoices

toathirdparty.Inreturntheywillprocesstheinvoicesandallowyoutodrawloansagainstthemoneyowedtoyourbusiness.Essentially,thesecompaniesprovideadebtcollectionandledgermanagementservice.Itiscommonlyusedbybusinessestoimprovecashflowbut

can

alsobeusedtoreduceadministrationoverheads.

Businessesthatsupplythisservicearecalledfactorsordebtfactoringcompanies.Invoicediscountingisanalternativewayofdrawingmoneyagainstyourinvoices.However,yourbusinessretainscontrolovertheadministrationofyoursalesledger.Aswellasprovidingfinance,whichisprobably

themainattraction,itoffersvaluablesupportservicesandcreditinsurance.Thisguidegivesinformationonhowdebtfactoringandinvoicediscountingwork,theadvantagesanddisadvantages,differenttypesoffactoringandinvoicediscounting,thecost,andhowtochooseafactorordiscounter.Section155.15.1AlternativestoBankLendingHirepurchase(frequentlyabbreviatedtoHP)isthelegaltermforacontractdevelopedintheUnitedKingdom,andnowfoundinIndia,Australia,NewZealand,IrelandandotherstateswhichhaveadoptedtheEnglishlawconcept.(InNorthAmerica,wherethewordhiremostcommonlyreferstoemployment,thecomparablesystemiscalledclosed-endleasing.)Incaseswhereabuyercannotaffordtopaytheaskedpriceforanitemofpropertyasalumpsumbutcanaffordtopayapercentageasadeposit,ahire-purchasecontractallowsthebuyertohirethegoodsforamonthlyrent.Whenasumequaltotheoriginalfullpriceplusinteresthasbeenpaidinequalinstallments,thebuyermaythenexerciseanoptiontobuythegoodsatapredeterminedprice(usuallyanominalsum)orreturnthegoodstotheowner.IntheUnitedStates,ahirepurchaseistermedaninstallmentplan;otheranalogouspracticesaredescribedasclosed-endleasingorrenttoown.Hirepurchasediffersfromamortgageandsimilarformsoflien-securedcreditinthattheso-calledbuyerwhohastheuseofthegoodsisnotthelegalownerduringthetermofthehire-purchasecontract.Ifthebuyerdefaultsinpayingtheinstallments,theownermayrepossessthegoods,avendorprotectionnotavailablewithunsecured-consumer-creditsystems.HPisfrequentlyadvantageoustoconsumersbecauseitspreadsthecostofexpensiveitemsoveranextendedtimeperiod.Businessconsumersmayfindthedifferentbalancesheetandtaxationtreatmentofhire-purchasedgoodsbeneficialtotheirtaxableincome.TheneedforHPisreducedwhenconsumershavecollateralorotherformsofcreditreadilyavailable.LeaseFinanceLeaseOperatingLeaseContractLease5.15.2Systemsofnon-bankloansandgrantsSmallFirmsLoanGuaranteeSchemeGrantsAcceptanceCreditsStockingLoansStartUpLoansVentureCapitalCompaniesBusinessAngelsSection165.16.1UsingFinancialAccountstoExamineTrendsInterpretationofAccountsa.SolvencyRatiosb.ProfitabilityRatiosc.CashManagementRatiosSection175.17.1Importanceofthesourceandtimingofbusinessincome5.17.2TheneedforsecuritySection185.18.1SecurityPropertywhichispledgedascollateralforaloan.Sometimeslenderswillaskyoutoprovidesecuritybeforetheyapprovetheloan.It'sasafetynetforthelenderincasetheborrowercannotordoesnotrepaythedebt5.17.3ProtectionProductsforBusinessLendingDeathCoverKeyPersonInsuranceFireandTheftPoliciesPropertyInsuranceIndemnityInsuranceLossofProfitsInsuranceLossofLicenseInsurancePublicLiabilityInsuranceProductLiabilityInsuranceEmployersLiabilityInsuranceProfessionalIndemnityInsuranceDirectors’andOfficiersLiabilityInsuranceMortgagedpropertyIfsometypeofpropertyisofferedassecuritysuchasacarorahousethenamortgageistakenoverit.Thelenderwillregistertheirinterestintheproperty.Propertythatismortgagedstayswiththeborrowerbuttheydonothaveacleartitleoveritandcannotsellitwithoutthelender'sconsent.AguarantorAnothertypeofsecurityisaguarantee.Thisiswhenaperson,theguarantor,agreestopaybackthedebtiftheborrowercan'torwon't.Beforeyousignasaguarantoryoumustbegivenacopyofthecreditcontractandadocumentthatexplainsyourrightsandobligations.Whenaborrowerfallsbehindwiththeirrepaymentsthelendershouldsendawrittennotice(adefaultnotice)toboththeborrowerandtheguarantor.Iftheborrowerdoesnothingaboutthedefaultnoticethenthelendercantakelegalactionagainstthemtohavethedebtrepaid.Sometimestheborrowercannotrepaythedebt.Whenthishappensthelendercantakelegalactionagainsttheguarantorandtheywillhavetorepaytheborrower'sdebt.5.18.2ThePrinciplesofGoodSecuritySimplicityofTitlleStabilityofValueRealisability5.18.3MarginsofSecutiryTotakeaccountofpossiblefluctuation,expensesandtime.5.