Security agreements are used to secure personal loans, commercial loans and other business obligations owed to a lender. A general security agreement is the most common type of contract used in commercial transactions. This is because it is an effective way to obtain business assets as collateral. Despite its popularity, general security agreements are complex and can have severe impacts on your business. This guide explains what a general security agreement is and what to consider before signing one.
A general security agreement creates a security interest in all present and future assets of the borrower. This means the lender would have access to all assets your business owns now and any future assets your business purchases as collateral for the loan issued. This type of agreement was as ‘fixed and floating charge’ before the Personal Property Securities Act 2009 (Cth) came into force. This agreement does not include real property but can consist of personal assets, licences and intellectual property.
Both the borrower and the lender have to sign this agreement. The lender might also require an individual or a corporate entity to sign as a guarantor of the debtor’s obligations. All security agreements have to be registered on the Personal Property Securities Register maintained by the government.
The GSA contains clauses that outline the procedure to follow if loan payment has defaulted or the business goes into receivership. Therefore, if the borrower defaults, the lender may decide to sell the assets to repay the loan. If the business goes into receivership, the receiver may choose to sell the collateral and the company to make up the lender’s losses.
In most cases, the lender will ask you to sign a general security agreement before granting a loan. This is to ensure the lender will get his or her money back if you default on your loan. However, you can negotiate in certain circumstances to avoid signing the agreement. For example, if you are purchasing a standard commercial property, you might be able to use the property as collateral. This would avoid the lender having an interest in all your present and future business assets.
