What You Need to Know About General Security Agreements

Looking to turn that business idea into a reality? Whether it’s to launch a startup or expand your existing operations, you’ll most likely need to either secure additional funding from third parties or fund the business yourself. You can do this by entering into a loan agreement and securing your interest.

What is a General Security Agreement?

A General Security Agreement (GSA) is a legal document used in business and finance to secure a loan or credit arrangement. It grants the lender (secured party) a security interest in the borrower’s (debtor’s) personal property or assets as collateral for the loan.

If the borrower defaults on their obligations, the lender can seize or sell these assets to recover the loan amount.

GSAs are common in corporate finance, allowing businesses to access loans while providing lenders assurance of repayment through secured assets.

After the enactment of the Personal Property Security Act 2009 (PPSA), lenders and borrowers can enter into a general security agreement.

What is the Purpose of a General Security Agreement?

The purpose of a General Security Agreement (GSA) is to protect a lender by giving them a security interest in the borrower’s assets as collateral for a loan. Key objectives include:

1. Securing a Loan: A GSA allows a lender to claim the borrower’s assets if they default on the loan, ensuring the lender can recover their funds.
2. Priority in Claims: The GSA establishes the lender’s priority over other creditors, meaning they have the first claim on the assets specified in the agreement.
3. Flexibility: It can cover a wide range of assets, including current and future property, providing a “blanket” security interest.
4. Facilitating Business Loans: The GSA makes it easier for businesses to obtain credit, as lenders are more likely to approve loans when backed by assets.

It helps reduce the lender’s risk while giving businesses access to necessary capital

As an analogy, think of it as a mortgage or caveat over your house. When you fail to pay the bank, the bank can step in and sell your house. This is similar to how a general security agreement works for assets other than real property (i.e. land).

What Must a Good Security Agreement Contain?

When drawing up a general security agreement, make sure to include the following clauses:

• grant of security interest
• delivery of the collateral
• obligations of the debtor/borrower
• the debtor or grantor’s representation, warranties, covenants and agreements
• the grantor’s rights to the collateral
• conditions of default and remedies in the event of default
• reimbursement of secured party
• termination of the agreement
• what happens upon termination
• notices

How Do you Register a General Security Agreement?

Generally, anyone with a security interest on a personal property can register online on the PPSR. There are several requirements for registration, and they are as follows:

• a description of the personal property (collateral type and class)
• details about the grantors (individuals or organisations) who gave the security interest
• whether the security interest is a purchase money security interest (PMSI) or not
• the duration of the PPSR registration
• additional details depending on the collateral class selected

Before you create a PPSR account, make sure that you have all the above information.