Lesson 1, Topic 1
In Progress

4.1 Collateral requirements for accessing funding are identified to determine if they can be met.

ryanrori January 7, 2021

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Definition of funding: Money provided by a funding organisation to make it possible for a business venture to achieve a predetermined objective,

Definition of collateral: Money provided by the owner of a business as his contribution towards the total amount of funding required for a predetermined objective.

     Banks require a form of security to safeguard their shareholders funds before they can lend money to anybody. This security can be in the form of a fixed deposit with the bank, the ceding of something of value such as a life insurance policy or a fixed asset such as a house or a piece of land or a contribution towards the total amount required by the owner. This contribution by the owner distributes the risk of loss in a given ratio between the person who wants to borrow and the bank who wants to lend such funds. Should a loss occur thereafter, both parties will lose. This makes the owner of the business more careful than if he only utilised the banks money and ran no personal risk of any loss.

     Banks will determine the percentage of collateral required in accordance with the risk according to their own analysis. This analysis is usually based upon a business plan presented to the bank by the entrepreneur. This adds another dimension to the reasons why you should be particularly careful in the drawing up and presentation of business plans for financial analysis.