What is a security agreement?
A security agreement outlines the security interest of a lender in a specific asset or property that functions as collateral for a loan. In case the debtor defaults on the loan, the lender has the right to foreclose and repossess the property or asset. One of the more common examples would be using real estate as collateral.
Security agreements in the business world
In order to start up operations and earn profits, businesses need capital up front. In order to acquire capital they usually take out loans from banks or investors. Since new businesses are unknown quantities, the lenders often require some form of collateral.
What a security agreement contains
A security agreement outlines the specifics of what asset or property functions as security. This can be real estate, production hardware or anything else the lender deems sufficient. As stated above, the lender can foreclose and take possession of the security in the event of the debtor defaulting on their repayment and then liquidate the asset/property.
The security agreement should also outline a repayment schedule. Until the repayment is completed, the security agreement grants the lender a security interest in the collateral.
Another important point is insurance. Security agreements should contain details on how the asset(s) used as security is/are insured against damages. This provides further security to the lender as it protects them against monetary losses in the event of a default, since they can still repossess the collateral and liquidate/use it.
If a debtor has to take out several loans, they may have to enter into several security agreements. It is important to note that assets or property used as collateral for one security agreement can be used in a second security agreement. However, the second creditor’s claim is subordinated. This constitutes cross-collaterization.
Property that may be used as collateral could be: product inventory, furnishings, equipment used by a business, fixtures, and real estate owned by the business. The borrower is responsible for maintaining the property and keeping it in a working condition. Unless required as part of the regular business operations, it may not be removed from the premises.