If you were asked to loan money to a company that you feared may be getting into financial difficulties, which of these courses of action would provide you with the most protection from default on the loan?
A)Rely on the principle of limited liability.
B)Require a mortgage over a specific asset of the company.
C)Require the accounts of the company to be audited.
D)Specify a particular accounting method to be used.

Question

Quizplus · Accepted Answer

Requiring a mortgage over a specific asset of the company would provide the most protection from default on the loan. In case of default, the lender could sell the asset and recover the amount owing. A and C are irrelevant as they do not provide additional protection from default, while D is impractical as it limits the company's accounting flexibility.

If You Were Asked to Loan Money to a Company