What is Pledge?

A pledge gives the creditor (pledgee) priority over other creditors. If the debtor fails to pay, the pledgee may sell the pledged asset and claim the proceeds first. This is called the right of summary execution.

There are two forms. With a possessory pledge, the pledgor hands the asset to the pledgee. Think of a jeweller giving a piece of jewellery as collateral. With a non-possessory pledge (silent pledge), the asset remains with the pledgor for continued use. This is the standard form in business financing: you pledge your inventory or machinery to the bank but keep using them.

A non-possessory pledge over movable assets requires a registered deed. The deed is registered with the tax authority. The same applies to pledging receivables: through a registered deed you can silently pledge receivables to the bank without your customers knowing.

In the event of insolvency, a pledge makes a significant difference. The pledgee can exercise their rights as if there were no insolvency proceedings. They do not have to join the distribution among ordinary creditors but can independently convert the pledged asset into cash.

For SMEs, pledging is relevant in two roles: as pledgor (you provide security to your bank or financier) and as pledgee (you take security from a customer who buys on credit).

A pledge is one of the instruments for protecting your financial position in business relationships. CIPS research shows that 80 per cent of invoices do not match contract terms. If you extend supplier credit without security, you risk being last in line when your customer has payment difficulties.

At the same time, as an SME owner you need to know which assets you have pledged to your bank. Many entrepreneurs do not realise that their entire inventory and debtor portfolio are pledged as part of their business financing. A contract register that also includes financing agreements and pledge deeds gives you that overview.