Transparent Secured Lending
What does security mean?
Unlike many other lending platforms, ThinCats offers true transparency - you choose which loans meet your investment needs and you can see what you are invested in at all times. Another key difference with ThinCats is that we are a secured lending platform. This means that all loans (except community & social loans) are backed by some form of security against the Borrower’s assets, which will help protect your investment in the event that the Borrower experiences difficulty repaying the loan.
What does this mean in practice?
In taking security to support a loan, ThinCats has the right to enforce that security and call on the assets offered by the Borrower, should an event of default occur. The ‘Types of security’ below describe some of the more common forms of security which can be achieved. The key points regarding security are:
- Secured lending is a term used where assets are offered by the Borrower to support a loan being advanced. This does not mean that a return on your capital investment is certain – your investment is still at risk.
- You are in an enhanced position to that of other creditors who may be only have an unsecured status.
- Having security over a Borrower’s assets can improve your recovery in the event of a default scenario.
- The level of security offered varies for each individual loan and is determined by the security grading. This can be identified by the number of padlocks allocated to a specific loan. For example, if the estimated value of the security at the time that the loan is assessed is low this will be graded as one padlock and the highest level of security is graded at five padlocks. The value of an asset(s) offered as security may change over time – for example, property prices could decline which will impact on the level of security held over land. This means that even with a five-padlock grading, your capital may not be completely protected.
- Security is only enforced when a Borrower is in default under the terms of the loan agreement. A default event can arise from a missed loan repayment, a covenant breach or other defined event.
- It may not always be in the lender's interests to take action to enforce security as soon as a default event occurs. There may be commercial reasons to support the Borrower for a period of time in order to maximise returns to all lenders.
- A Borrower may provide multiple securities to Lenders, subject to any negative pledges. This means where a Borrower has provided a negative pledge a new lender is unable to take security without the prior consent of any existing lender with the benefit of the negative pledge.
- In order to be effective, the security must be “perfected”. This means that various registrations must take place, for example at Companies House and the Land Registry (where applicable). Only if the relevant registrations have been carried out will the security be valid.
Having security for your loans helps reduce your exposure to potential losses and enhances your position where the Borrower experiences problems, but does not make this a risk-free investment.
Types of security
The types of security set out below are the most common forms that you may see in lending situations. However, there are numerous other forms of security that may be considered from time to time depending on the type of business and assets owned by a Borrower. The security package considered appropriate for a specific loan will be set out in the Information Pack specific to the relevant loan.
A debenture is a document which creates both a fixed charge and a floating charge over the assets of a Borrower. A charge is effectively a way for a lender to obtain rights over the benefit / equity in specific assets of a Borrower as security for a loan.
A fixed charge can be granted over any asset which is capable of being specifically identified. It will, amongst other things:
- prevent the Borrower from disposing of the asset charged without the lenders consent;
- allow the lender to sell the asset in the event of a default in order for the proceeds of sale to be used to repay the secured liabilities; and
- require the Borrower to maintain and insure the asset
A floating charge is a charge over assets which will change from time to time in the course of the Borrower’s business, for example, stock, cash at bank and book debts. Essentially, all assets which cannot be charged by a fixed charge can be covered by a floating charge.
The floating charge enables the lender to take security whilst not restricting the Borrower’s ability to carry out its business by dealing with its stock and receivables. It also enables the lender to charge assets that are owned by the Borrower at the time the charge was granted or in the future. In the event of a default on a loan the floating charge will usually convert or “crystallize” into a fixed charge which the Lender can then deal with as set out above.
A floating charge also gives the lender some influence in the event of any insolvency of the Borrower in that providing the floating charge contains certain provisions which makes it a Qualifying Floating Charge, the lender can appoint an Administrator as a means of enforcement.
A mortgage is similar to a charge except for the fact that it involves the actual transfer of title to an asset to the Lender as security on the condition that when the obligations to the Lender have been fulfilled it will be transferred back to the Borrower. This transfer of title gives the Lender more ability to realise the security and prevents the Borrower from selling or otherwise disposing the asset.
There are two types of Mortgage, Legal and Equitable. An equitable mortgage is one where the Borrower essentially enters into an agreement with the Lender to create a legal mortgage in the future if required or demanded by the Lender. A legal mortgage prevents the Borrower from dealing with the mortgaged asset while it is subject to the mortgage and can be granted over any real property (e.g. land) or chattels (plant, machinery, fixtures and fittings).
Legislation has affected the way a legal mortgage over property is created. As a result of the Law of Property Act 1925 (LPA 1925), a legal mortgage of property is now normally created by the borrower executing a document creating a charge by way of legal mortgage, rather than by it transferring the legal title of the property to the lender. This is also sometimes called a "legal charge" so that the terms "mortgage" and "charge" have become largely interchangeable when referring to security over property. Technically they are different legal concepts.
Even though title is not transferred to the lender (as it is with a mortgage of other assets) this type of security interest gives the lender equivalent rights and creates a legal interest in the land.
A guarantee is a promise made by a third party, usually a company or individual connected to the Borrower, to either:
- ensure that the Borrower fulfills its obligations; or
- fulfil the obligations to the Lender on behalf of the Borrower.
Accordingly, the liability of a guarantor to the Lender can never be greater than the liability owed by the Borrower to the Lender.
Where a guarantee is being provided the guarantor may be asked to provide security for that guarantee. For example, if a parent company was providing a guarantee it could be asked to provide a debenture so that in the event it failed to fulfil its guarantee promise the Lender could enforce its security against the guarantor as opposed to the Borrower. This is a particular advantage where the guarantor may be more “asset rich” than the Borrower. Likewise, where an individual is providing a guarantee they may be asked to provide security for it, for example providing a legal mortgage over property they own.
Unless a guarantee is secured as described above, it merely represents a promise. If that promise is breached the Lender has the right to take action against the guarantor which usually takes the form of county court proceedings.
Protecting you through process
There are three stages in the lifecycle of a loan:
- Credit - ThinCats will assess all loans before they are made available to retail investors.
- Monitoring - ThinCats monitor the Borrower’s trading and financial performance in addition to any covenants as set out in the loan agreement.
- Recoveries - Should a Borrower experience difficulties in repaying a loan, ThinCats has an experienced recoveries team acting on behalf of lenders to ensure that you get the best recovery possible.
A loan will not be listed on our platform until our credit team have undertaken their due diligence, and made sure the loan meets our credit criteria. We allocate considerable resources to determining a Borrower’s ability to service its debts, and the team will turn down any loans that they consider are too high risk. The credit team is also responsible for the allocation of our credit and security gradings, which in addition to determining the interest rate, on a risk adjusted return basis, also provide an additional decision tool for you, when considering your investment decision.
The security package recommended by our Credit Team will also be reviewed by our Securities Team to ensure that the security offered is capable of being granted and can be perfected.
Our in-house monitoring team performs regular monitoring reviews on Borrowers to ensure that they are performing to plan. As part of the monitoring, Borrowers are typically required to submit the following information on a quarterly basis:
- Management accounts (including balance sheet, P&L and comparison with budget)
- Up-to-date aged debtors and aged creditors reports
- Confirmation that VAT PAYE and other tax liabilities are up to date (with supporting documentation)
- Certificate of compliance with financial covenants and supporting computations
- General trading update
The financial information is reviewed and any issues or adverse trends will be discussed with the Borrower. The team are also responsible for monitoring any covenants as set out in the loan agreement. In addition to this all loans are tracked via an external risk analysis system, which provides daily credit and business information, and further drives the monitoring process.
It should be noted that the monitoring reports are not available to lenders and reports to the individual syndicate members of each loan are by exception only.
In the unfortunate event of a Borrower defaulting or entering into a formal insolvency process, our recoveries team strive to obtain the best possible result for our lenders, and closely examine the precise details of each case before making any decisions. Once the full intricacies are known, then the best strategy to maximise recoveries for lenders can be determined – taking the time to understand the business and the issues, and analyse processes that may help save the business and protect the assets. Where necessary we will engage with independent professional advisors such as property and chattel asset agents, solicitors, reporting accountants and insolvency practitioners. The recoveries process may sometimes seem slow, however, there can be complex legal issues that need to be addressed.
At all times, we are working to maximise the recovery of the outstanding loan for the benefit of all lenders.