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Collateral Management Agreement

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A collateral management agreement helps borrowers apply for loans.

In modern economies, financial institutions put into place risk management procedures to prevent operating losses emanating from borrower defaults. A collateral management agreement helps banks to advance funds with minimal credit risk.

  1. Identification

    • A collateral management agreement is a legal arrangement in which one party (the borrower) agrees to transfer goods to another party (the custodian) as a financial guarantee before a third party (the bank) advances loan funds, according to SGS Group, an inspection, verification, testing and certification company.

    Significance

    • A collateral management agreement is central in modern day economic transactions. The agreement helps profitable but cash-strapped companies to secure funds to improve operating activities and expand their businesses. Without such agreements, otherwise economically healthy firms may experience operating difficulties in the short term.

    Features

    • In addition to identifying the lender, the borrower and the custodian, a typical collateral management agreement features specific clauses. These include procedures to follow when receiving the collateral, financing party requirements and policies ensuring the physical integrity of goods, according to Marine Allied Technical Services, a marine risk insurance broker.

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