Lombard loan

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A lombard loan is granted to business units secured against movables, mainly including securities, commodities and precious metals.

Lombard loan of the central bank - a loan secured against securities granted to commercial banks by the central bank.

Lombard loan of a commercial bank - granted to natural or legal persons. For the duration of the loan agreement, the bank takes over the pledged movable property, and if the customer fails to repay, it acquires the possibility of selling the pledge.

The lombard loan in a commercial bank is intended to collate securities, products, receivables and valuables, e.g. insurance items. The loan is a short-term loan and its main feature is the possession of the object of pledge by this bank. It is granted not to its full value most often against securities. The lombard loan, which is granted against pledge, imposes the valuation of the subject of the pledge, which is performed at the expense of the client. The specialists appointed by the bank are designated for the valuation. Usually the loan amount ranges from 20% to 80%

Lombard rate

The lombard loan rate is the main interest rate of the Central Bank and it usually performs the function of the maximum rate. This means that it defines the marginal cost of acquiring money on the international market.

The Lombard rate sets the price at which the Central Bank is able to grant Commercial Bank loans under the pledge of securities. The Lombard loan amount can not be greater than the equivalent of 80% of the securities that are pledged. Setting the Lombard loan rate is one of the main tasks of the Monetary Policy Council.

Lombard loans and Lombard credit protection

Lombard loans are granted for a period of not less than 7 days and not longer than 3 months. The interest rate offered by the bank is competitive with the pawnshops. Pawnshops are not banks and therefore have the possibility to grant loans of a consumer nature.

The lombard loan may be secured by various savings books of banks, vouchers or blocking of cash on the accounts. The Bank may also accept other forms of security such as jewelry, gold or goods.

Characteristics

  • A characteristic feature of this loan is the bank's possession of the pledge. Therefore, it is most often provided against securities, the actual storage of which does not cause difficulties for banks. Although banks usually do not have storage facilities for storing goods, they can grant lombard loans under their pledge, represented by a warrant, which is a special component proof. In many shopping centers, where freight stocks accumulate (especially in port cities), there are special warehouses that provide services in the form of storing goods.
  • Some of them are authorized to issue the so-called warrants stating the fact of storing certain goods and enabling the transfer of ownership of these goods by way of endorsing the warrant. A warrant may be the subject of a pledge. The bank accepting freight in this form must take into account the risk associated with the goods, e.g. in the form of a drop in the price of the good, reduction in its quality, etc. Therefore, the amount of lombard loan granted is usually lower than the value of the pledge.

Conditions for obtaining a lombard loan

  • a lombard loan may be paid on a one-off basis or in tranches to the account specified by the bank
  • the lombard loan may be paid on the same day
  • having current and forecasted credit repayment capacity but also paying interest
  • agreeing on the collateral required and signing the credit agreement

Loan size

The maximum loan size results from the accepted limit of the loan to the value of the pledge, which for securities is usually 50-75% of their market value.

Examples of Lombard loan

  • A Lombard loan is a secured loan typically used by companies to access working capital. A company might use a Lombard loan to purchase raw materials, pay employee salaries, or invest in new equipment. The loan is secured by a collateral, such as stocks, bonds, or other financial securities. The lender has a right to repossess the collateral if the loan is not repaid.
  • A Lombard loan is also used by individuals to access funds for short-term investments or other needs. The loan is secured by assets such as jewelry, precious metals, or other valuable items. The lender has a right to repossess the collateral if the loan is not repaid.
  • A business may use a Lombard loan to purchase a piece of equipment or finance a large purchase. The loan is secured by the equipment being purchased, and the lender has a right to repossess the equipment if the loan is not repaid.
  • A business may also use a Lombard loan to finance the purchase of inventory. The loan is secured by the inventory, and the lender has a right to repossess the inventory if the loan is not repaid.

Advantages of Lombard loan

A Lombard loan is a type of loan granted to business units secured against movables, mainly including securities, commodities, and precious metals. The main advantages of Lombard loans include:

  • Flexibility – Lombard loans are incredibly flexible, allowing borrowers to easily adjust loan terms and repayment schedules to meet their needs.
  • Quick Access to Funds – Since Lombard loans are secured by collateral, borrowers can access funds quickly without having to go through the lengthy process of obtaining a traditional loan.
  • Lower Interest Rates – Since Lombard loans are secured by collateral, lenders are willing to extend loans at lower interest rates than traditional loans.
  • No Credit Checks – With Lombard loans, borrowers are not subject to credit checks, making it easier for those with poor credit to access funds.
  • Increased Security – Since Lombard loans are backed by collateral, borrowers have increased security in knowing that their assets are safe in the event of a loan default.

Limitations of Lombard loan

A Lombard loan is a form of secured loan which is secured against movables, such as securities, commodities and precious metals. This type of loan is typically used for short-term, working capital needs and carries some limitations, such as:

  • Restrictions on the type of collateral allowed - Lombard loans usually only accept high-quality securities and commodities as collateral, and only certain types of precious metals are accepted as well.
  • Restrictions on the amount of loanable funds - Lombard loans are typically smaller in size, with the maximum amount typically not surpassing the value of the collateral.
  • Risk of devaluation - The value of the collateral can fluctuate over time, resulting in the loan amount becoming overvalued and potentially putting the borrower in a difficult situation.
  • High interest rates - Lombard loans typically come with higher interest rates than other types of loan due to the higher risk for lenders.
  • Time required for processing - Lombard loans can be more time consuming to process, due to the need for the lender to assess the value of the collateral.

Other approaches related to Lombard loan

A Lombard loan is a type of loan that is secured against movables such as securities, commodities and precious metals. Other approaches related to Lombard loans include:

  • Asset-based lending - this is a type of loan that is secured against assets owned by the borrower. It is typically used by businesses to access additional capital.
  • Factoring - this is a financial transaction where a business sells its accounts receivable (invoices) to a third party (called a factor) at a discounted rate in exchange for immediate payment.
  • Invoice discounting - this is a form of short-term financing in which a business borrows money against its unpaid invoices.

In summary, Lombard loans are a type of loan that is backed by movables such as securities, commodities, and precious metals. Other approaches related to Lombard loans include asset-based lending, factoring, and invoice discounting.


Lombard loan — recommended articles
Credit Facility — In-House Financing — Evergreen Loan — Ijarah — Staged payments — Unsecured Note — Quick assets — Swingline loan — Cash Transaction

References

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