If you are planning to advance money to an independent party it is advisable that you seek some form of security or interest to protect your investment.
The nature of the security or interest you should seek will depend on the type of investment made and also on the identity of the party who is to benefit from the advance.
The following are the principal forms of security that you should consider:
If you are advancing money to a company, the most obvious form of security is to obtain shares in the company (see How to buy shares in a company).
Another useful form of security is a mortgage over land. If the borrower (the mortgagor) defaults in the loan payments, you will have the right to enforce a mortgagee sale, but will need to follow strictly the procedure for exercising this right (see How to know your rights and obligations as mortgagee (lender).
You may also try to obtain a chattels mortgage, which is a charge over the borrower's property in the lender's favour. Chattels are generally movable, tangible articles of property, such as cars, household appliances and furniture.
Another legal form of charge is a debenture â€“ this is a document used as security indicating that a debt is owed and will be paid. This may create either a fixed or floating charge on the property.
A "fixed" charge gives you a security interest over a specific asset or assets of the borrower (such as land or machinery), and the borrower cannot dispose of that asset or those assets unless you, the charge-holder, consent to it. By contrast a "floating" charge is not on any specific asset, but is on the borrower's assets generally; the borrower can therefore carry on business as normal and dispose of any of its assets as it wishes.
You may be able to get someone to guarantee the loan, which means that this person (the guarantor) would be responsible for the borrower's debt if the borrower defaults in the loan payments.
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