Cross Collateralization – Bad for business?

Cross Collateralization

Cross-collateralization is a term used when the collateral for one loan is also used as collateral for another loan.

Cross Collateralization example

A person/ company has 2 equipment loans with the same financier. One loan for an excavator which is secured by the excavator. A second loan for a skid steer which is secured by the skid steer. The financier can use both assets as cross-collaterals for both loans.

This means that if payment cannot be made on the excavator, the lender can repossess the excavator AND the skid steer under their Cross Collateralization clause.

Client Cross Collateralization experience

This is a recent experience by one of our clients. It demonstrates why it is advisable to consider spreading your financial commitments across a number of lenders.

Equipment and Mortgage with the same bank

The client runs a dry hire machinery business providing equipment to mines under contract. They have an Overdraft and a Property Loan with their bank.

Their bank holds a mortgage over their residential property as security. Together with a Fixed and Floating Charge over the assets of their business.

They also have Equipment Finance Facilities with the same bank. Their bank manager had told them that the Equipment Finance facilities were “stand alone”. And not linked in with the security for the Overdraft or Property Loan.

Loan application declined

The client wanted to increase his existing Property Loan or Overdraft Facilities. The bank declined the application despite our client running a
successful business. The reason given was that his bank was concerned with the mining industry slowing

Therefore, our client was stuck. They needed increased banking facilities for new contracts won, but their bank said no.

The client went to another bank. The new bank was happy to provide increased banking facilities and to pay out their original bank.

But only if the new bank received the residential property and a fixed and floating charge over their business as security. The new bank was not in a position to also pay out the equipment finance facilities with his current Bank.

The client went back to their original bank and explained the proposal. Their original bank stated they hold a Fixed and Floating charge over their business. The bank captured the Equipment Finance under this security. Due to their Cross Collateralization clause in all their finance contracts.

This meant that they would have to pay out all banking and Equipment Finance facilities with their original bank first. Our client was still stuck due to the 2nd bank not being prepared to do this.

Lessons to be learnt

Consider keeping your core banking facilities through one Bank and place your Equipment Finance through other financiers.

See another post on why using one bank is not a good choice.

A Bank may say that the Equipment Finance is “stand-alone”. When assessing their facilities the Equipment Finance will tend to be included.

By having all your eggs in one basket this could impact you on obtaining an increase in your core banking facilities or being able to change Banks

Talk to a professional such as Brendan Scotter of Commercial Point Finance. We have access to a large number of financiers and products. Consequently we may be able to assist you with diversifying your equipment finance to another financier or across a number of financiers.

Commercial Point Finance has a wealth of experience and long standing relationships with all the major and minor lenders in Australia.

Give us a call to discuss your particular circumstances – 02 9453 0300