Let’s say your business owns equipment that it provides to other businesses. You want to give another business some machinery that you think will help them make lots of money. However, they’ve had some financial troubles and there’s some concern that they won’t be able to pay for the machinery. To protect the ownership of your equipment and your investment in their business, you’ll want to write up a financing statement. Financing statements can be used in a range of different circumstances and you should talk to a commercial lawyer about whether you need one.
What is a Financing Statement and Why Are They Important?
A financing statement basically locks in your interest in things you have provided to another business on loan. To find out more about security interests, read up on them here. It’s a document that must be registered with the Personal Property Securities Register (PPSR). Financing statements make sure their interests are protected in case the business using them cannot pay their debts. It provides lending businesses with added security in case things go wrong.
They’re essential to have so that your equipment remains yours when the business you’re financing to, becomes insolvent. When a business fails and has to pay back its debts, you’ll want to make sure you get these things back. Registering a financing statement on the PPSR, means you’ll get special priority when trying to get your equipment back because you have publically registered your interest in the things you’ve provided to another business under the agreement. You’ll need this priority so that you get your loaned items back before other creditors. Without it, you might find your property out of your hands when debts are being paid.
Contained in the Financing Statement:
The specific requirements of a financing statement are contained in section 153 of the Personal Property Securities Act 2009 (PPSA). Some of the things under this law are difficult to understand. If you want to protect your interests by drawing up a financing statement, speak to a commercial lawyer to make sure you’re fully covered. Take due care when writing a financing agreement because one that is misleading will be ineffective.
The following contains a general guide of what should be contained in a statement. Keep in mind that it does not include everything.
Party Details
This will include both the secured party as well as the debtor. The secured party is the business to whom the debt is owed. They’re the ones lending their equipment to other businesses. The debtor is the party that owes the obligation to the secured party. They’re usually the business that uses the equipment.
Details about these parties need to be specific to ensure that they are known to third parties. Full names, business identifiers (such as ABNs or ACNs) and addresses are all necessary details in ensuring that parties are identified correctly.
The Grantor
The grantor is the party who creates the security interest. A lot of the time, this is the same party as the debtor, but this is not always the case.
Details about the grantor should be of the same clarity as other parties. Their details should be clearly identifiable to third parties outside the transaction with names and addresses. Details included also change depending on the status of the grantor. For example, if a business is a partnership, then an Australian Business Number (ABN) must be provided. However, a body corporate must provide an Australian Company Number (ACN) instead.
Collateral
Collateral is an asset that lenders will take as security for a loan. Providing collateral for loans will reduce the risk for lenders in case the borrowing party cannot pay off their debts.
There are different rules for different types of collateral. Firstly, it must be either consumer property or commercial property and these are defined in the PPSA. Certain types of collateral must be described by serial numbers, such as cars, boats, and aircraft. The class of the collateral must also be described. For example, agricultural goods and intangible property (such as patents) are different classes of goods and this should be noted in the financial statement.
Security Interest
The financial statement should provide an indication of whether the security interest is, or is to be a ‘purchase money security interest’ (PMSI). PMSIs are a special kind of security interest and only arise in certain transactions described here.
The Duration of the Financial Statement
The default duration of financial statements changes depending on whether the equipment loaned is consumer or commercial. If you do not want to rely on the default, it should be clearly stated so that all parties are aware of obligations (including third parties). If it is not, the default is 25 years for commercial property and seven years for consumer property.
Conclusion
If you’re in the business of providing leases to other businesses, registering a financing statement with the Personal Property Securities Register is one of the most useful things you can do. It will protect your interests in the collateral property in the event that debtors become insolvent.
Keep in mind that the list above is not comprehensive and only provides a general idea of what should be in a financing agreement. If you think you’ll need to submit a financing statement to the PPSR, it’s best to speak to a lawyer to ensure your interests are properly protected.
