Collateral Transfer facilities provide an excellent model for short to mid-term financing and solutions for raising capital. However, they are not the be-all and end-all solution to longer term business or project finance…
Collateral Transfer facilities provide an excellent model for short to mid-term financing and solutions for raising capital. However, they are not the be-all and end-all solution to longer term business or project finance.
Collateral Transfer facilities are not suitable for long-term financing needs, i.e. 7 years or more.
It is important that the business principal (the beneficiary) match-funds their enterprise. That means that you match short-term assets with short-term finance and long-term assets with long-term finance or mortgage. If the principal is seeking to utilise Collateral Transfer facilities to import into his enterprise to enable them to raise fast and efficient project capital, for example, a real estate development or to finance a long-term or permanent company project, then it is important to plan ahead and focus on the exit strategy. By this we mean the migration from using the funds raised short or mid-term (up to 7 years) under the Collateral Transfer facility, to funds borrowed for the longer term. Unless of course the plan is to sell off the project once completed as this would provide the means to repay any credit secured on the Collateral, allowing the Collateral Transfer facility to expire well within term.
Therefore, attention should be paid to exit strategy from the very beginning. It is important that when applying for these facilities that any collateral (Bank Guarantee or Standby Letter of Credit) is unencumbered prior to expiry. For this, you will need to demonstrate that you have the ability to repay any liens or loans secured against the collateral prior to the collateral expiration. Of course Collateral Transfer facilities can be renewed year on year but many providers will not extend beyond 5 or 7 times, meaning a maximum of 7 year terms are available.
In the case of real estate development for example, the Principal may choose to utilize Collateral Transfer and credit secured thereon as a means to raise the capital to commence the project. Then, when the project is complete, to re-finance with conventional longer-term finance solutions such as mortgages or conventional asset loans if the asset is to be retained. Alternatively, they may sell the development; this too provides suitable exit strategy.
It is our advice to never enter into a Collateral Transfer facility without first planning ahead with your exit strategy. Collateral Transfer does not purport to be cheap, however, it is an ideal tool to utilize in seed or start-up projects if a long-term solution is implemented at the back-end.