Generally, pledging for cash is the last option for people who need cash for their businesses. You can pledge against anything valuable that you have if the lenders will accept this. But financial advisors usually advocate for other options.
So, What Is the Pledging of Shares?
Let’s say that you have shares somewhere in a big company and that you have been receiving profits every month. In this case, you can take a loan against these shares from lenders who offer this option. According to corporate promoters who have benefited from this option, it is a quick way to save a business that is not doing well or start a new venture altogether.
However, it is advisable to have a robust repayment plan to avoid financial strain. Also, the use of the money should be worthwhile, and all risks involved should be assessed carefully. Potential solutions should be available just in case they are needed.
Reasons to Pledge Shares
This is already mentioned in the introductory note. But it is worth explaining it in detail. The pledging of shares is an excellent option for many although it has some risks as we are going to see below. If the following needs become pressing, then the pledging of shares for the company becomes necessary.
- Obtaining working capital – if the business is not doing well, the promoter, who is usually the main shareholder or the person most involved in running the company, may feel obliged to do something. Therefore, the promoter will resolve to take out loans. When this option is utilized, then the business may resolve its financial crisis or expand its operations as intended.
- Diversifying the investment – entrepreneurs are always looking for other avenues to diversify their operations. It is common for companies to give birth to others. One of the options used to fund the new ventures by the company promoters is through the pledging of shares. When these loans are used well, such businesses can really prosper.
- Paying off outstanding loans – if a business has a loan that has already taken a toll on it, then this option can be used to clear that loan. According to experts at boostcredit101.com, this option will help the business to increase its credit drastically. However, this means checking the new loan’s terms and conditions and ensuring that they are better than those of the loan that has been a challenge. Otherwise, the same problem will recur.
Are There Any Risks Involved?
The deal looks so good and straightforward, right? But many promoters are oblivious to the possible challenges that they may face ahead. Ultimately, it is always good to assess these challenges before the pledging of shares. For now, here are the common challenges related to the pledging of shares that most businesses encounter today.
- Difficult to maintain the value of the collateral (shares) – for those who understand how shares work, they keep fluctuating up and down in value. We have heard of companies whose shares have consistently gone down for years. So, imagine when these shares have been used to secure a loan. Of course, there will be problems here and there because the lender will require you to maintain the value of the collateral. In severe cases, the lender may change the terms and conditions, which can be a doubled pressure to the company.
- Lenders selling the shares – this is not good at all! But it happens anyway. Previously, there have been cases where lenders have sold the shares in an open market to recover their money if the company has failed to repay as agreed. The problem with this is that the lender may sell the shares at a lower cost as long as they recover their money. The promoter will lose her or his part of the company especially if the promoter had used all of her or his shares.
Does It Have an Effect on the Company’s Credit?
Well, yes. And it all depends on several variables. In one scenario, the company may boost its credit if the money is used carefully. It can be used to repay a loan with unfavorable conditions, making it easier for the business to manage its finances. If there is a re-investment to expand the business, this is also a benefit to the credit score.
On the other hand, the company can face the other side of the coin when things start to go south. If such a case happens, the credit score may be affected negatively. But if good plans are in place, it is easy to take care of this.
The pledging of shares has its pros and cons. From what we have seen, any promoter can go for this, but it is important to first assess whether it is worth it for the business or not. In this case, the decision to go for it depends on the outcome of the analysis completed by the promoters. Overall, it is a worthy course of action.