Collection risk and security
When issuing a loan or supplying goods or services with payment in instalments or with supplier credit, an entrepreneur is exposed to collection risk. Indeed, there is always a chance that the other party will not pay. Financial securities are stipulated to cover this risk. Some examples are rights of pledge and mortgages, or retention of title or suretyship.
Underestimated, but commonplace
Banks make everyday use of these options, and almost every entrepreneur will have encountered them when arranging a loan. In addition, what is known as commercial paper is used in international trade. Examples are letters of credit (LCs) and ‘payment against documents’ and similar clauses.
It is also common in trade for bank guarantees to be required, such as with a lease or large supplies, or when your customer has payment problems and a repayment arrangement is needed. In the event of nonpayment you can sometimes invoke rights to improve your position relative to other creditors. Examples include right of retention with a contract for services, and right of recovery with a sales contract.
Taking the right steps
The first step is to establish security interests in the proper manner. The second step is to make them enforceable in the correct way, should that be necessary. You might then be the entitled party, but you might equally be confronted with a bank or other creditor who wishes to assert security interests or rights of priority.
All these forms of financial security are highly specialized legal subjects, on which the attorneys-at-law of Vorstman Advocaten are ideally placed to advise you. It is vital to establish these rights in good time, or to exercise them correctly, and to take advice beforehand. The difference that the correct use of security interests makes is usually substantial.