The law underpinning financial products is inevitably very important when structuring a facility. The concept of trade finance law also adds a level of difficulty as we usually see a greater level of complexity in the lending scenarios.

Why is the law important when it comes to trade finance?

Law underpins all lending; as security and the collateral it attaches to sits behind a facility. The concept of security will determine the facility level, price and comfort of any lender when assessing a company for a potential lend. Taking security will be by way of legal documentation and this will clearly set out what the security package will look like and the governing provisions. It will also stipulate what further indebtedness and pledging of security is permitted.

What is the typical type of security?

A standard lending security instrument will be an all assets debenture. This will cover all accounts, stock, receivables and other assets within the company. A lend will be secured by this instrument, so it allows the financier to step in, in an event of default scenario and enforce their rights over all assets secured under the facility.

How does a personal guarantee work?

In some circumstances personal guarantees may be used and these could be ‘supported’ or ‘unsupported’ by assets, such as property. Personal guarantees may also be limited to a certain value of funds; so that if called on then claims can only be up to a previously agreed certain ceiling. In a typical company structure lend, a personal guarantee means that a lender can claim outside of the limited company structure; to personally go against the individuals providing the guarantee.

Are legal charges on property common?

We usually see the use of legal charges on property when there is a direct lend in relation to a specific asset. On a residential basis, this is a mortgage or first charge over the property. This allows the lender first recourse in the event that there is a problem with the borrower and security needs to be enforced. However, there will sometimes be ‘second charges’, which will be another charge on the property that will rank behind the first charge on the property.

A second charge may happen when there is a prior charge on the property and there is sufficient equity left in the property to register a charge from another lender.

How may two lenders work together?

In a larger transaction; there may be club or syndicated deals of a number of lenders working together. An agent or appointed representative will govern the transaction and this will be set out in the agreements entered into. In the event that a facility is not so structured, then a deed of priority may be entered when there is more than one lender; this will govern security and rankings in a default scenario.

What happens on an invoice or receivables finance transaction in the legal sense?

When an invoice is raised, the end buyer has a number of credit days to pay the debt. A funder will come in and fund the receivable or invoice; providing a percentage of the value of the invoice, to the borrowing company. At the end of the credit terms when the debt is to be paid by the end buyer; the funder is to be paid back. Thus, the debt is ‘assigned’ to the financier and they will be paid back from the end buyer.

The legal side of a trade finance transaction is of central importance as by having the correct documents and security structure in place; it allows comfort in an event of default or problem scenario.