Security Documents, Loans & Your Business

Are you looking at taking out a loan? Make sure you understand the paperwork involved beforehand.

One security document that almost all lenders require a business to sign prior to a loan being provided is a general security agreement.

This is because a lender is looking for a guarantee that your business will be able to pay back the principal amount and the interest in full.  To provide this, lenders will usually require:

  • thorough investigations on your business and its cash flow;
  • you to make specific representations which must remain true during the term of the loan;
  • your business to provide undertakings that it must perform; and
  • you and your business to sign security documents that grant the lender rights over your assets.

A general security agreement or GSA is a security document that gives a lender rights over all your business’s present and future assets (including tangible and intangible property). This does not however include assets such as land or statutory licenses. If your business defaults on the loan, the lender will be entitled to take enforcement action against you, including

  • Appointing a receiver over your business and
  • Selling the secured assets

Before signing a GSA, you should consider the following:

Is The GSA Required? 

It is essential to question why the lender requires the additional security and, if possible, negotiate with the lender to remove the requirement to provide a GSA. It is in your interest to limit the security you provide to the lender to secure the loan, as otherwise, the security may not be proportionate to the loan amount.

Are The Terms Of The GSA In Line With The Industry Standard?

A GSA is a standard security document required by lenders, so the terms of a GSA should follow standardised expectations across the financial sector. Consult with your lawyer to ensure that the terms are within expectations, or to negotiate for the GSA to be drafted to be in line with the industry standard. 

What Are Your Other Obligations Under A GSA?

Your legal obligations under a GSA will generally include:

  • effecting and maintaining adequate insurance policies over the business assets with a reputable insurer;
  • providing the secured party sufficient information about the business assets to allow it to protect its interest over the assets; and
  • not dealing with business assets without the secured party’s consent unless it is in the ordinary course of your business.

What Are The Restrictions On Dealing With Your Business Assets

A standard GSA places significant restrictions on your ability to deal with your business assets, without the lender’s consent. Under a GSA, there may be restrictions on the business’s ability to:

  • sell or transfer the business assets. If any assets are sold, the proceeds may need to be applied to the debt unless the secured party agrees otherwise;
  • permit others to have an interest over the assets;
  • transfer the control of the assets to others, and
  • alter the nature of the assets.