10.8.2-RISK AND THE RELATION TO TRADE CREDIT-PHYSICAL RISK
When funds are advanced against stock in trade, the goods so financed are usually pledged to the lender as guarantee of repayment: they become the security or collateral. Banks do this by taking out a general lien over stocks and collectables (outstanding invoices) through which beneficial ownership rests with the bank until all outstanding advances have been refunded in full.
In long-established relationships banks may be satisfied with this. They may leave the management and physical control of the goods to the borrower, especially if general international guarantees are in place, for example from a trade house's parent company.
But for smaller operators, and certainly those in new or relatively recent relationships, the banks will want to be satisfied that checks and balances are in place. These checks could include having the goods stored by public warehousing companies that issue warrants or warehouse receipts in the bank's name or hand warrants to the bank 'endorsed in blank' which permits the bank to freely transfer or assume title. The bank's lien will extend to the proceeds of any insurance claim that may arise, since all the goods must be insured with an agreed insurer, on conditions acceptable to the bank. Even so, banks may still demand additional security guarantees.
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