One security document almost all lenders require a business to sign before providing a loan is a general security agreement. When a lender provides your business with a loan, it wants to be sure that your business can repay the principal and the interest in full. To ensure this, the lender will 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 is typically used to ensure these requirements. This article explores four things you should consider before your business signs a general security agreement.
What is a General Security Agreement?
A general security agreement or GSA is a security document that gives a lender rights over all your business’s present and future assets. This includes all tangible and intangible property like:
- intellectual property;
- cars;
- shares; and
- business inventory.
However, assets like land, fixtures attached to a land, and some statutory licences like mining tenements are not captured by a GSA due to the operation of the law. If your business defaults on its loan, the lender may take enforcement action, including:
- appointing a receiver over your business; and
- selling the secured assets.
The terminology in a GSA is different to other loan documents. For example, in a GSA, the person granting an interest, which generally is the borrower and corporate guarantors, is the ‘grantor’. The person receiving the interest, being the lender, is the ‘secured party’.
Things You Should Consider Before Signing a GSA
As with any legal document, you should carefully review the GSA before signing it. Here are four things you should consider before signing a GSA:
1. Consider Whether the GSA is Required
The purpose of providing security is for the lender to be satisfied that it has access to enough of your assets, should you default on your loan. Therefore, the security provided to a lender must be proportional to the loan amount.
In such circumstances, 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.
2. Consider Whether The Terms of the GSA Are in Line With the Industry Standard
A GSA is a standard security document required by lenders. As such, the terms of GSAs are standard also across the finance sector. You should seek legal advice before entering into a GSA. Your lawyer should carefully review the GSA to ensure the terms are not more onerous than the industry standard. If they are, you should seek an explanation from the lender and, to the extent possible, negotiate for the GSA to be drafted in line with the industry standard. Industry groups like Asia Pacific Loan Markets Association have released standard forms of the GSA, and your lawyer should have access to this.
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3. Be Aware of Your Other Obligations Under a GSA
Borrowers are more likely to focus on the commercial terms of a loan document like the interest rate and the monthly repayment amount of the loan, instead of their legal obligations under those documents. However, you must consider and understand your obligations. A grantor’s legal obligations under a GSA generally includes:
- 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.
4. Consider 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. This is to ensure that the business does not deal with its assets in a way that is detrimental to the lender’s interest. The lender wants the assets to remain the same or substantially the same while your business owes the lender money.
Under a GSA, there may be restrictions on the business’ 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.
Key Takeaways
A general security agreement is a standard security agreement that lenders require a borrower or corporate guarantors to sign before providing a business loan. The agreement grants the lender an interest in all present and future assets of the business. Like any legal document, you must understand the terms of the GSA and your obligations under it before signing. If you are in the process of acquiring a business loan and require assistance, you should contact LegalVision’s banking and finance lawyers on 1300 544 755 or fill out the form on this page.
Frequently Asked Questions
You should carefully consider whether you need to use a GSA. If you have already provided security to cover your loan through other methods, a GSA may be unnecessary and onerous.
There is an industry standard for GSAs. Therefore, you and your lawyer should look to that to ensure that your GSA is in compliance with that standard. If it is too onerous or is not compliant, contact your lender and negotiate with them before signing the GSA.
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