COLLATERAL MANAGEMENT AGREEMENT
Using A Third Party Warehouse to Provide Security To Fund Your Sales
Typically for transaction of a minimum $5m+. Financing for your business by transferring ownership of the goods to the funder secured by using a collateral manager to control the sale of goods as agreed in the management agreement
COLLATERAL MANAGEMENT AGREEMENT "CMA"
How It Works
A CMA is a bailment agreement and is usually made between the borrower, lender and inspector (or "collateral manager"). The borrower, as original bailor of the goods, bails the goods to the collateral manager, and the collateral manager, as bailee, acknowledges the transfer of possession of the goods to the lender ("attornment") and agrees to hold the goods on the lender's behalf in accordance with the terms of the CMA. Attornment is vital in order to ensure that the lender has good security.
The collateral manager is entrusted with physical possession and control of the financed goods and is legally responsible for storing, securing and monitoring them. It will issue a warehouse receipt to the order of the lender upon receipt of the financed goods and will only be permitted to release them on the lender's instructions.
Once the goods have been sold and the lender has been repaid by the borrower, or the inventory finance leg has been refinanced by a receivables finance leg of the transaction, the lender will authorise the collateral manager to release the inventories to the borrower or the new owner. However, in the event of a payment default, a lender can retain access to and control of the financed goods, and consider the legal options available to enforce its rights against the borrower and the collateral.
Importantly, as demonstrated by the recent case of Scipion Active Trading Fund v Vallis Group Limited , a CMA will, as a matter of English law, grant the lender as bailor a right to possession of the goods, irrespective of the validity of any security agreement in place between the borrower and lender in respect of the goods, entitling the lender to claim damages against the collateral manager in the event of breach of its obligations under the CMA.
Lenders in this space are looking for experienced clients, reputable CMA managers and a sound customer base to ensure a market for the goods. They also expect the client to fund at least 20% of the purchase value of the goods.
BENEFITS OF A COLLATERAL MANAGEMENT AGREEMENT
There are benefits for the client and the funder with this form of financing. For the client:
Leveraging a 20% deposit to buy greater volumes of goods.
Using the stock being purchased as security.
Increasing sales as goods can be purchased in greater quantities.
Increasing margins and they benefit from economies of sale.
As long as there is access to suitable CMA managers markets in more difficult countries can be opened up.
For The lender:
With a reputable CMA manager, strong security.
A tried and tested method of Financing trade.
Supporting well managed businesses, sometime in difficult jurisdictions.