Managing Trade Credit Insurance Deductibles and Uninsured Exposure
Manage trade credit retentions by haircuts on borrowing bases, strict discretionary limit compliance, and funding self-insurance from gross margin.
Secondary Security
Meaning
Additional form of collateral or credit enhancement provided to protect a transaction in the event that the primary security is insufficient to cover the debt. This secondary security often takes the form of a personal guarantee, a lien on a specific piece of equipment or a pledge of shares. It provides an extra layer of protection for the lender or supplier, increasing the likelihood of full recovery during a default.
The value of this security is only accessed after the primary assets are exhausted.
Collateral Type
Choice of asset for this purpose depends on the nature of the borrower’s business and available resources. A manufacturing company might offer a secondary security interest in its raw material inventory or a specific production line. This ensures that the creditor has multiple avenues for repayment if the main cash flows of the business fail.
Lien Priority
Legal standing of this security is usually subordinate to that of the primary lender. If the business is liquidated, the holder of the secondary security receives payment only after the senior creditors have been satisfied. This lower priority makes the security less valuable than primary collateral but still offers more protection than an unsecured position.
Default Mitigation
Having access to multiple types of security reduces the overall risk of a total loss. Credit managers use secondary security to approve higher credit limits for customers who operate in volatile industries or who have limited cash reserves. This arrangement allows trade to continue while maintaining a defensible position for the supplier’s treasury department.
The security must be properly perfected through legal filings to be effective.