Question

1. One thing lender sometimes require when lending money to a small corporation is an assignment of the common stock as collateral on the loan. Then, if the business fails to repay its loan, the ownership of the stock certificates can be transferred directly to the lender. Why might a lender want such an assignment? What advantage of the corporate form of organization comes into play here?

Answer 1

Lender will want such an agreement because this will help him gain control of the organisation in case the company is not able to pay him with the required money so he will secure himself with the collateral so he would not have to face the risk of bad debt and he can recover the money by selling his shares.

So in order to have a sense of security and lower the credit risk associated with the debt, the lender wants to acquire the shares of the company in order to have a better option in hand, to sell them as share have high liquidity.

Advantages that corporate form of organisation comes in here, that a corporation has ease of transfer of ownership interest. This will help the lender to acquire the shares easily and sell it more easily.