Meaning
A security mechanism allows a business to pledge its stock of raw materials or finished goods as collateral for a bank loan while retaining possession of the goods. Manufacturing enterprises use inventory mortgages to raise working capital without interrupting their daily production cycles. This transaction must be registered with the unified registry platform of the People’s Bank of China to establish priority against other creditors.
The borrower is allowed to sell the inventory in the ordinary course of business, provided that the proceeds or replacement stock are maintained at a specified level.
Priority Registration
Online registration of the security interest is required to protect the bank’s claim against third parties. Under Chinese civil law, inventory mortgages that are not registered on the public platform will not be enforceable against a bona fide purchaser who buys the goods in good faith. This makes prompt filing essential.
Operational Flexibility
Borrowers can continue to use the mortgaged raw materials in their factory to maintain production and fill customer orders. The unique feature of inventory mortgages is that the security interest automatically transfers to new replacement inventory as old stock is consumed. This allows the factory to maintain a constant flow of operations.
Default Remedy
Lenders can initiate foreclosure proceedings if the borrower fails to pay the loan or if the value of the security drops below the margin. In cases involving inventory mortgages, the bank may seek a court order to seize the remaining stock or to freeze the sales accounts of the borrower. This legal action halts further sale of the goods.
