Hypothecation

In debt financing, we often hear the term “hypothecation of xx”.

Hypothecation simply refers to the pledging of assets as security for the funds borrowed.

A typical example is the bank lending working capital which involves a hypothecation of INVENTORIES and BOOK DEBTS. In this case, the current assets still remain with the borrower but in case of default, the bank may seek recovery of the loan by instituting a lawsuit to seize the hypothecated assets which can later be sold.