Security Agreement

A security agreement is a legal document that grants a lender a security interest in an asset or property of a borrower. This agreement is used as collateral to secure a loan or other financial obligation. In the event the borrower defaults, the lender has the right to seize the specified collateral to recover the debt. Security agreements are commonly used in secured lending and involve assets such as real estate, equipment, or inventory.

Example

A business might sign a security agreement with a bank when taking out a loan to purchase new machinery. The machinery itself is listed as collateral in the security agreement, allowing the bank to repossess it if the loan is not repaid.

Key points

• Grants a lender security interest in the borrower’s property.

• Used as collateral for securing loans.

• Provides the lender with rights to seize the asset if the borrower defaults.

Quick Answers to Curious Questions

How does a security agreement benefit lenders in terms of risk management?

It ensures that lenders have a claim to the collateral, reducing their exposure to loss if the borrower defaults.

What are the potential risks for borrowers when entering into a security agreement?

Borrowers risk losing the asset pledged as collateral if they are unable to fulfill their payment obligations.

How does a security agreement differ from other forms of loan security, such as guarantees or promissory notes?

Security agreements involve collateral that the lender can seize, whereas guarantees rely on a third party to cover the debt, and promissory notes are simple written promises to pay without collateral involved.