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What is Cross-Collateralization?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 14 September 2016
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Cross-collateralization is the ability to make use of cash flow generated by one project to cover the expenses of a different project. This strategy is employed in a number of different business situations. Often, the ability to engage is this type of financial arrangement is covered in the terms and conditions of legal documents related to the projects in question.

One example of the use of cross-collateralization is found in the recording industry. A record company may choose to use the proceeds generated by the sale of one musical release to fund the development of a new release. Essentially, this means that money is advanced from one project to cover the expenses of a new project. As the new release begins to earn money for the company, the advanced funds are repaid to the original project.

The use of cross-collateralization may be utilized in property management as well. In the event that a shortfall takes place with one property, the owner may choose to make use of the cash flow from other properties in order to cover the expenses associated with the under-performing property. Once the property begins to produce up to expectations once again, the funds that were used to cover the shortfall are replaced.

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Cross-collateralization is also used in the process of granting loans. In this scenario, property that is already in use as collateral for one loan is allowed to be utilized as collateral on a second loan. One common example of this type of collateralization is when a home owner is allowed to use the property as collateral for both a first and a second mortgage.

The ability to employ cross-collateralization is normally covered in contracts and other binding agreements used in business deals. These terms and conditions grant the lender or the corporate entity the right to make use of funds generated by one project to provide some assistance with another project. The expectation is always that the new project will eventually be able to generate revenue in its own right and thus allow for any collateralization that took place to be recovered in full at a later date.

Using cross-collateralization is often seen as an efficient way to make use of available resources. By allowing for new projects to be funded by the cash surplus generated by other projects, it becomes unnecessary to borrow funds from outside sources or delay the start of a new project. When employed properly, cross-collateralization can strengthen the overall financial picture of the corporation and provide benefits for all parties concerned.

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