Lending and borrowing, give and take; these dynamics are prevalent in most relationships. However, in the business world, delivering on a promise (particularly where owing money is involved) is made enforceable under a general security agreement. When providing a loan as a bank or from one business to another, it is important to ensure that the business will be able to repay the principal, and the gained interest. A general security agreement enforces the lender’s right to payment of the debt or loan by putting this promise in a written contract. This Business Kitz article will detail what security interest is, how to register assets that have security interests over them and what considerations should be made going into this agreement.
What exactly is a security interest?
The main types of business loans are secured and unsecured. Secured loans are considered the safest and best option to protect your business due to higher accountability. Generally, it is either your personal property or assets of your company that will be held as security for the loan, or in other words, a lender is technically granted the rights to make a claim over these assets should commitments made to repay the debt falter. In simple terms, if you fail to repay me, I can claim your assets provided as collateral. Under the Personal Property Securities Act 2009 (Cth) this type of right, or ‘back-up’ to a failed repayment, is defined as a security interest.
What does a general security agreement do?
Security interests are created under a general security agreement that provides written evidence of this interest being provided as collateral. The agreement must show mutual consent and secure the obligation or repayment of a debt. Some examples of an agreement that create a security interest, beside a general security agreement over company assets that you may have heard of include:
- Car loans (i.e if a car cannot be purchased outright, a bank will register a security interest over a loan taken out for this purpose);
- Hire purchase agreements (goods); and
- Service contracts secured by a security interest.
While it is not a legal requirement, it is generally best practice to protect your business beyond the terms and conditions set out in your general security agreement by registering your security interest on the government’s official Personal Property Securities Register (PPSR). This means that the general public and any potential investors are made aware of which company assets have security interests over them.
What to consider when entering into a general security agreement
The key to ensure that you are not being cheated out of what is owed to you or are giving up an excessive amount of personal assets, is that the provided security should be based on the loan amount, i.e the assets you provide as collateral should equal what is being borrowed. Registering security interest as assets on the PPSR is also particularly important for enacting your rights to property in cases when the borrower may become insolvent or bankrupt, as it will be easier for them to find you, to add to their list of priorities for repayment. Any security interests that you record on the PPSR should ideally be recorded in a written agreement to ensure it is legally binding and covering all bases.
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To strip it back, the easiest way to think about a security interest is that it is a caveat to hold the business you are providing a loan to responsible through a ‘threat’ of claiming their personal property should they fail to meet their obligations. This gives you solid protection should there be any conflict in your business dealings. If your business is entering a loan and wanting to create a general security agreement, Business Kitz can ease the process with our customisable agreement templates that are up to date with legal standards. If you need legal advice or have not received payments for a debt, our sister company, Legal Kitz, can assist you. You can book a free 30-minute consultation with their experienced and highly qualified team via our website now.