Secured lending is a common practice in Ireland and across the globe. It’s a way to assist either businesses or individuals in paying for equipment or other materials needed to continue their endeavors.
Understanding secured lending is important for making the best financial decisions, whether you’re the borrower or the lender.
In this practical guide, we’ll address the differences between secured and unsecured lending, the types of acceptable collateral for secured lending, and frequently asked questions surrounding secured lending in Ireland.
What is Secured Lending?
Secured lending refers to a personal or business loan that requires collateral to borrow the money. Often, banks require some form of collateral for a person to be eligible for large loans.
Collateral may include physical assets, such as vehicles or property. It may also include liquid assets, such as cash.
By taking part in secured lending, borrowers may receive lower interest rates, as the loan is considered lower risk. That being said, some types of secured lending involve higher interest rates. This is often the case for personal loans with a party with a lower credit score. It may also be the case for short-term installment loans.
The Difference Between Secured and Unsecured Lending
The purpose of both a secured and unsecured loan is for a borrower to borrow money from a central bank.
Any type of loan, whether it be a personal or a business loan, can be either secured or unsecured. With secured lending, a form of collateral is offered to the lender in good faith. This provides a security measure in case the borrower defaults on the loan.
Unsecured lending is the opposite of that. No form of collateral is needed if it is deemed an unsecured loan. Often, banks will approve unsecured loans if the borrower has a higher credit score and a positive financial and credit history.
Risks related to Secured Lending for Lenders
While the risk of agreeing to a secured loan for lenders is lower than an unsecured loan, there is still a disadvantage for lenders. If a borrower defaults on the loan and the personal property must be seized, the lender then has to go through the motions of acquiring said property.
Risks related to Secured Lending for Borrowers
The biggest risk associated with secured lending for borrowers is the fact that ownership of property is on the line. With secured lending, the property of the borrower that is named on the loan is at risk. If a borrower defaults on the loan, they risk their property being seized.
Before taking out a secured loan, whether it’s personal or business-related, it is crucial to have a payment plan for the loan amount in place.
Different Types of Acceptable Collateral for Secured Lending
Certain lenders may have specific collateral they accept for a borrower to obtain a secured loan. The most common include:
- Blanket lien collateral
- Business equipment collateral
- Cash collateral
- Inventory collateral
- Investment collateral
- Invoices collateral
- Real estate collateral
Determining which type of acceptable collateral is best for a borrower depends on their unique situation. Once a decision has been made as to the appropriate collateral, working with a banking and finance legal advisor is the best way to put the legal structures in place to ensure that your security can be enforced in the event of default and to best secure your interest in the agreed collateral.
Secured Lending FAQs
Do foreign lenders require a licence/regulatory approval to lend in Ireland?
Put simply, no. Secured lending to corporate borrowers and taking advantage of the security of assets does not require foreign lenders to be licenced in Ireland.
That said, lending to “consumers” is regulated. This often includes providing secured loans to individuals acting outside of a business.
As of now, foreign lenders offering secured loans to an Ireland base are not required to register or provide reports under the Credit Reporting Act of 2013. To continue this, though, they must be based outside of Ireland and they must not be incorporated in Ireland.
Are there any laws or regulations limiting the amount of interest that can be charged by lenders?
Broadly speaking, no regulations or laws are limiting the amount of interest that can be charged by lenders for corporate lending purposes.
There are restrictions for a lender attempting to charge interest at a higher rate if the borrower is in default on the loan.
For consumer secured lending, protection against outlandish interest rates is in effect by the Consumer Credit Act 1995.
Can a company in Ireland grant security over its future assets or for future obligations?
This is possible by way of a floating charge element within an “all-assets” debenture. This element includes current assets of the company and any possible assets that may be obtained from the corporation in the future.
Can a single security agreement be used to take security over all of a company’s assets or are separate agreements required concerning each type of asset?
An “all-assets” debenture may be agreed upon to include security over all of a corporation or company’s assets. It is one security contract that is entered into by the corporation or company willingly. The “all-assets” debenture is often more advantageous for the lender as it assumes security over all assets of the borrower.
Can security be taken over the following types of assets: real property (land), plant and machinery; equipment; inventory; receivables; and shares in companies within Ireland?
Yes. Security of plant and machinery equipment and real estate can be taken by way of charge. A legal charge is another name for a secured loan. A charge allows a lender to secure the money they have lent to an individual or company. It is a legal document signed by the borrower which is registered against the company in the Company Registration Office (CRO) to alert any potential buyer of the existence of the debt. Where the security is land, it will also be necessary to register the charge with the Property Registration Authority.
Are there any issues that lenders should be aware of when requesting guarantees (for instance, financial assistance or lack of corporate benefit)?
There are a few things lenders should be aware of when requesting guarantees. For one, lenders will need to file appropriate documentation such as Form C1 or Forms C1A and C1B through CRO. These will need to be completed online, and a filing registration cost of €40 must be paid.
Filing a Form C6 for the Declaration of Satisfaction of a Charge or filing a Form C7 for the Declaration of Partial Satisfaction of a Charge costs €15. There is no online filing option available for lenders for these two forms.
Because of the nature of intellectual property, the costs for filing differ. The assistance of a trademark attorney may also be needed.
To register the security in the Property Registration Authority (PRA), a cost of €50 per deed is required.
Are there any other tax issues and/or incentives that foreign lenders should be aware of when lending in Ireland?
Because of Irish tax laws, unless exempt, a foreign lender that receives Irish source interest income is liable to Irish income tax. If the lender is resident in the EU or another state or territory that has a double taxation agreement with Ireland, they may be exempt from Irish income tax.
Each situation, whether it be for a borrower or a lender, or a company or an individual, presents a unique case. There is no “one-size-fits-all” box we can put unsecured or secured lending into.
Moreover, if a borrower and lender decide to enter into a mutual secured lending agreement, they will need to determine the best course of action in terms of collateral.