I’m lending him $$$, what are my options for security?

In business, you sometimes find yourself as a lender. It might be because:

• you are selling your business or asset to a young, bright, energetic soul, who doesn’t have the full price, so you are vendor financing the deal, or
• a regular customer has asked for a longer credit period for payment of invoices, meaning that you are effectively acting as their bank, or
• your business partner has asked for a short-term loan to get them through to an income point, or
• you are leasing a building, and as part of the deal, you are lending the fit out costs to the tenant.

Whenever you are lending money, or financing someone, you need to consider what your security will be.  The advantage of having good security is that it means you should be able to avoid launching legal proceedings against the debtor and incurring high legal costs, and wasting your time.  Instead, you are able to skip that step, and move straight to recovering your finance via the security. The common options for securities are:

• No security. Usually for family members only!
• If the borrower is a company, you can ask for a personal guarantee from the director of the company.
• If this is a vendor finance deal, at the least, you would take a security (General Security Agreement or GSA) over the assets being sold, so that if the purchaser defaults and ceases payments, you have a right to recover and sell the asset. Car dealerships use this type of security when they provide vehicle finance – a GSA over the vehicle allows the dealership to seize the car and sell it if payments are not met.
• A GSA should be registered on the Personal Property Securities Register, so that it does not rank behind other GSAs that the borrower has granted. You want to be first in line for repayment.
• A mortgage over property, e.g. a home or business premises, is the high watermark for security and gives the lender the most protection from loss upon default. That’s why the banks take mortgages! Keep in mind that you should be first ranking mortgagee so that other lenders do not have priority over you.
• A bank guarantee is a guarantee that the borrower’s bank will pay the lender an amount up to the bank guarantee limit, upon demand by the lender without question. These are excellent securities and are often used in leasing and in construction. These can be expensive for the borrower.

In all situations it is crucial to obtain legal advice.  Security documents only provide the protection that is written into the document – there are no ‘standard’ rights that apply in all cases.  Different securities are appropriate and more or less effective in different circumstances.  Keep in mind that if the borrower has asked the bank for a loan and been rejected before coming to you, there may be cogent reasons that security is a good idea. We stand by the content of this article. However please note it is not legal advice for you, because it is summary in nature, and it does not take account of your circumstances. If you would like legal advice please make an appointment to speak with us.