The following Banking & Finance guidance note provides comprehensive and up to date legal information covering:
A lender's primary concern is that it is repaid. If a borrower becomes insolvent, the lender may have to share the borrower's available assets with other creditors and only receive part of what it is owed as a result. Lenders often take security to protect themselves against this risk and increase the likelihood that they will be repaid. Where security is provided, the lender gets an interest in the security provider's asset(s) giving it comfort that it will be able to recover amounts from the borrower in the event of the borrower's insolvency.
Alternatively (or in addition), a lender could take a guarantee from a third party in respect of the borrower's obligations to the lender. If the borrower fails to repay the loan, the lender can make a claim for payment upon the guarantor. This increases the lender's likelihood of getting repaid, particularly if the guaranteeing entity is a good credit or has influence or control over the borrower (for example, if it is the parent of the borrower).
Not all loan facilities are secured. For example, investment-grade loan facilities to large public companies are often unsecured because:
security would prejudice other financings
putting security in place is likely to be costly and time-consuming process for this type of borrower, and
security gives a single bank or syndicate of banks
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