Loan Types Extended to Chinese Companies
What: The two main types of debt financing, or loans, used in China are chattel mortgages, where a moveable piece of property serves as collateral for the loan, and equity pledge lending, where personal holdings or third-party holding shares serve as collateral.
Why: Understanding the types of financing that Chinese companies use can help you make informed decisions around how you structure your relationship with your Chinese business partner.
In China, there are two primary types of debts (or loans) that banks issue to Chinese companies: chattel mortgages and equity pledges.
Chattel mortgages are a type of a debt financial instrument where a borrower seeks to secure funds for a moveable piece of property. Movable property is any piece of personal property (chattel) that physically can be moved from one location to another. (It is contrasted with immovable property, the prime example being real estate). In business terms, examples of movable property include machinery, vehicles, or other business assets. The borrower uses the funds to purchase the movable property, and that piece of movable property serves as security, or collateral, for the loan. The lender holds interest in the piece of movable property.
Equity Pledge Lending
Equity pledge lending (or line of credit) is a type of financial instrument where the borrower pledges personal holdings or third-party holding company shares as collateral for the loan. Examples of this kind of financing include working capital loans, commercial draft discounting, package loans, or corporate technology upgrade loans.
There are no material advantages of one type of financing over the other; each borrower’s situation will be unique and will choose the type of financing that best suits the situation.
Questions? We can help. At Nuna Network we offer a variety of valuable guides, tips, and other practical information to help you navigate the sometimes complex landscape with Chinese businesses. We remain the partner of choice for small- and medium-sized businesses seeking guidance in researching, developing, and launching relationships with companies in China. We are your go-to resource for valuable information in navigating the sometimes complex landscape of business operations in China.
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