There are five aspects which bankers and finance company officers have to consider when deciding on what type of security is good or adequate security for the loan, advance or credit facilities. The valuation of securities are also to be considered. These five general principles for the guidance of lenders are as follows:
(a) First, the values of the security must be capable of being ascertained without much difficulty and such value must be consistent over the years. Needless to say, where the value of security depreciates, three will be a problem in respect of that security as the lender’s margin of advance or loan may have been touched. Where the value of the security appreciates, it is possible that the borrower may want much more advance or credit facilities than what he has received.
(b) The second test of acceptable security is that of realisability. The ease with which the security can be sold is a factor to beat in mind. Ideally, the security should have some documents of title which can be transferred without much cost or trouble such as going to court.
(c) Connected with the above requirement is that of the validity of such title. The title to the security should be perfect and unquestionable. One should not be put into considerable expense or undue trouble when perfecting such title. Expenses may includes legal fees, costs and charges as well as stamp duties.
(d) On the title aspect; one should also consider the indeteasibility of the security as prospective purchasers would not want to buy that security if the title can be subject to dispute by third parties which may have a claim on that security. Thus, whether possible, the title to the security must be free from liability to third parties and free from any sort of encumbrance. This will also ensure that the security can be easily realized by way of sale or otherwise.
(e) The fifth aspect is considered from the borrower’s point of view. Most conveyances, charge documents and agreements have to be stamped, and there will be some cost involved in the taking of the security, all of which are usually borne by the borrower.
From the lender’s point of view, where the security is adequate and legally sound, the lender may well consider the stamping costs to assist the borrower to cut down his costs. Of course, this aspects is not regarded as a normal test of what is a good form of security but considerations of stamping may well be a factor to the borrower in his decision of whether to accept or reject a loan.
