When you are looking for a commercial loan for your business project, the bank may ask for credit guarantees. This can take many different forms.
Traditionally, a distinction is made between:
- Real guarantees relating to assets having an intrinsic value
- Personal guarantees involving a debt obligation for one or more people
- Moral guarantees that do not provide the lender with any real legal security
- Privileges which are established by law and are not the result of an agreement between the parties
1. Real guarantees
A real guarantee is a preferential claim on a movable or immovable asset belonging to the borrower or a third party which gives the lender a preferential right on the price of this asset. Some of the best-known real guarantees include:
1.1 In property :
The mortgage is a real right of the lender to an immovable given as security. If the borrower defaults, the bank may ask to sell the property to repay some or all of the remaining loan balance. In the context of business credit, the property taken as security may be either the property financed by the credit to be covered or another property belonging to a third party, for example the entrepreneur themselves.
The mortgage for any amount
A person undertakes to give the building they own as security for the repayment of a loan. If the debtor no longer repays their loan, the credit organisation can therefore put this property up for sale, under certain conditions, in order to recover the lent and non-reimbursed funds from the sale price, using the property seizure procedure. The mortgage for any amount is granted to guarantee not only the credit for which you explicitly give your building as a guarantee, but also all the commitments you may make to the same credit organisation (personal loans, car financing, overdraft, etc.), hence the name "for any amount".
In the event of the non-repayment of these other loans you may have concluded with your credit organisation, the latter could also require the sale of the building that you gave as a mortgage when you signed your mortgage loan.
However, the law imposes a condition: the secured claims must be determined or determinable at the time of signing the mortgage deed. This means that the deed must state that the mortgage constituted at that time may secure other claims, which may be determined later on the basis of criteria that existed at that time.
The mortgage mandate (semi-real guarantee at the start)
With a mortgage mandate, the borrower gives the lender permission to take out a mortgage registration as soon as the lender deems it necessary. The difference from the mortgage is that the buyer gives permission to take out a mortgage, but the lender does not yet do it and may never do it. A mortgage mandate must be in the form of an authenticated deed. The advantage of a mortgage mandate is the reduction in costs it generates, compared to a credit deed.
The mortgage promise (moral security at the outset).
One option that banks use more rarely is the mortgage promise. Lending institutions generally avoid this option because it entails the lowest level of security for them. In fact, it is a simple commitment, which consists of a private contract by the customer to mortgage their property at the request of the bank. In this event, the operation does not need to go before a notary or the mortgage office.
- It is beneficial to propose to a bank that it takes out a partial mortgage on a property and takes the balance of the guarantee via a mandate. This reduces notary fees while guaranteeing the bank. Note that this gain will be nil if the mandate is carried out.
- It is possible to offer a second tier for a mortgage guarantee to another bank when the first-tier credit is partially repaid.
- A mortgage guarantee has a term of 30 years. It is therefore beneficial at the end of the loan to request the lifting of the mortgage guarantee or to leave it active to guarantee other loans.
1.2 In the field of movable assets
- the pledge on a business
- the pledge on securities or valuables
- the bank guarantee (payment, performance guarantee, Breyne Act, tender, advance payment refund, rental, for public authorities)
- insurance, including credit insurance
- pledge on insurance contracts
- guarantee of parent company
- pledge on a pension fund
- payment guarantee for the seller (via documentary credit)
- buyer's delivery guarantee (via documentary credit)
- the guarantee granted by the Brussels Guarantee Fund*.
*The guarantees granted by the Brussels Guarantee Fund are also real guarantees and can be decisive in the granting of financing. The Brussels Guarantee Fund's mission is to simplify the granting of professional loans in the Brussels-Capital Region by granting credit institutions, subject to the payment of a one-off flat-rate contribution, a substantial share of the guarantees they require from Brussels businesses.
2. Personal guarantees
The best known personal guarantee is suretyship. Suretyship is the contractual relationship in which a surety engages to answer for the debt or default of a principal to a third party. By requiring a surety, the financial institution extends its guarantee to assets outside the company. A surety can be in the form of a "surety bond."
Suretyship required by the banker is generally a joint and several liability. Most guarantees in today’s market are drafted as “joint and several” guarantees, meaning that each guarantor is both jointly liable (as a member of the group) and individually liable (on its own separately), to the lender for the repayment in full of a borrower’s indebtedness. It is therefore necessary to be very cautious before giving a guarantee and, if possible, to limit the amount and the duration.
- It is generally strongly discouraged to grant private guarantees to cover business commitments, but it is not always possible to do otherwise. Only the ban on seizing the main residence of the self-employed natural person exists. However, this protection of your principal residence is not automatic. It requires you to make a declaration of unseizability before a notary. You also have to hurry. This declaration only protects against business debts arising after the transcription of the declaration. It is therefore not possible to protect yourself after the fact.
3. Moral guarantees
Moral guarantees do not give the bank any priority claim. They are essentially based on trust that the borrower will meet commitments. In the event of a credit denunciation, the lender is on the same footing as other creditors, if not worse.
One of the best-known moral guarantees is the mortgage mandate. The mandate is an agreement whereby the owner of a property gives an irrevocable mandate to the lender to take out a mortgage on a movable asset. Any conversion of the mandate into a mortgage may take place without prior notice by the beneficiary of the guarantee and at the expense of the principal. The mandate fee is significantly lower than the mortgage fee. For the lender, a mandate does not represent real security, as there is nothing to prevent the borrower from granting a first mortgage on the same property to another lender. The lender could then take out a traceable mortgage for a small amount in addition to the mandate for the remaining portion. The notary will notify them in advance if a new surety is granted on the property.
The mortgage promise is also considered a moral commitment initially but could be transformed into a real guarantee, like the mandate.
A privilege is a right granted by law due to the particular nature of the claim which, in the event of "concurrence of privileges", allows the creditor to be paid as a priority with the proceeds of the assets (or part thereof) of the company/debtor.
The granting of prvileges is reserved for the legislator, who also determines the place (tier) that a particular privilege occupies among other privileges.
A distinction is generally made between general and specific privileges. Special privileges take precedence over general privileges. General privileges cover the whole of the estate or an abstract part of it and stipulate that a specific claim must be paid before another. For special privileges, a specific asset is used to secure a defined debt. The preferential claim is paid as a priority with the proceeds of this property.
For the financing of capital goods, the bank often demands that it can take the place (be subrogated) in the rights of the unpaid seller.