When thinking about collateral for a bank loan, most people tend to think of assets like property, equipment or accounts receivable. The Credito Emiliano bank in Italy, however, is well known for accepting cheese as legitimate collateral for a loan. This short article will take a look at this unusual form of financing.
Cheese as an Asset
Although incredibly valuable as a food ingredient, cheese seems like a surprising form of asset, especially seeing as it is usually considered to be a temporary and less valuable object compared to traditional assets. That is perhaps why many people find it surprising that the Credito Emiliano bank accepts this food source as security against their loans.
The Parmigiano Reggiano cheese, which is produced by Italian farmers, is actually a very valuable commodity in Italy and worldwide, with each ‘wheel’ having a potential price tag in the thousands of dollars. It therefore makes sense that the bank has its own warehouse filled with the cheese, which it has accepted as collateral for more than 60 years.
Supports the Locals
The longer Parmigiano Reggiano matures (up to 36 months), the more taste it acquires and thus more value. This makes it an excellent method for the farmers to harness their tied up working capital by using the cheese as collateral against a loan to invest in their business.
The businesses can thus keep running smoothly with a line of security which would not be offered by most other banks, if any. It could therefore be argued that having this option for collateral gives support to a local industry and provides a boost to the overall Italian economy.
Accepting cheese against something as valuable as a loan is certainly not without risk. During maturation, the cheese must be kept under precise conditions in order to avoid it swelling and cracking (which can eliminate its value completely).
The industry in which the cheese is sold also has its risks, as a drop in demand of one percent can equate to a drop of ten percent in price. Therefore, the price of this perishable asset is far from fixed, and thus it is a risky investment even as a traded commodity. That being said, the fact that the system of Credito Emiliano has worked for so long suggests that the rewards outweigh the risks.
Cheese as loan collateral is just one of the many forms of alternative finance which is becoming increasingly popular in the recession hit society of today. Many people are looking to rely less on the traditional forms of financing and searching elsewhere to enhance their finances. The very fact that cheese can fund a loan shows that the sky really is the limit when looking to raise personal and business funds. Given that there is a 93% chance of an interest rate hike on the horizon, according to Fawad Razaqzada of Forex.com, and therefore loans and mortgages are likely to become more expensive, alternative forms of finance are always welcome sight.
Those who are not Parmigiano Reggiano producers may have trouble trying to use cheese as collateral for a loan, but the method has certainly stood the test of time in Italy. Therefore, it may only be a matter of time before more creative sources of collateral are found elsewhere in the world.
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