Written by
Anjaly Tessa Saji
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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.
General Security Agreement
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 a ‘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, licenses, 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.
When Can a General Security Agreement Be Used?
The GSA contains clauses that outline the procedure to follow if a 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 for the lender’s losses.
Do I Have to Sign a General Security Agreement?
You can negotiate in certain circumstances to avoid signing the agreement.
In most cases, the lender will ask you to sign a general security agreement before granting a loan. This ensures the lender will get his or her money back if you default on your loan.
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.
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Key Points to Note Before Signing a General Security Agreement
It is important to consider the following before signing a general security agreement:
- Often you are risking losing more than you need to. For instance, if you have provided a registered first charge over the debtor’s real estate as collateral, the general security agreement is excessive. This results in the lender having too much security over the loan.
- You cannot use your business assets to get a loan if you have signed a GSA with a different lender. This can have a significant impact on the growth of your business.
- You cannot offer third party security over any of your business’s assets without the lender’s consent. For example, you will need to seek consent before allocating assets as security for trade credit with a supplier.
In short, while general security agreements play an important role to access finance, it is very important to consider future consequences of this agreement. Regardless of the type of loan, you have the responsibility to ensure the following before signing a GSA:
- Consider all your options.
- Take time to consider and understand all the terms of the agreement.
- Review the Personal Property Securities Register to check what has been registered against your company
- Review your credit report occasionally.
If you have further questions or wish to seek advice on a security agreement, it is worth consulting a banking and finance lawyer.
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