Everything You Need To Know About The Different Types Of Business Loan Security
Getting a business loan usually means providing security. There are many options for doing so available to the business borrower, each with their own pros, cons, and impacts on both your business and your financing.
General Security Agreements
General security agreements (GSAs) are broad-reaching agreements that cover all assets in a business. They are commonly used for a wide variety of different kinds of credit, including overdrafts from banks and one-off large loans.
GSAs can be great because: They are simple and may give you access to large loan amounts. If it’s an asset for your business, it’s covered under the GSA – unless specifically excluded either through an agreement with your lender or through a specific security agreement (more on that later).
GSAs can be tricky because: They cover all of your business assets. This includes those you currently own and those you gain in the future. You have to specifically ask for a particular asset to be excluded from a GSA.
Specific Security Agreements
Specific security agreements (SSAs) are less broad than a GSA, using a single asset or group of assets as security.
SSAs can be great because: They can get you enough credit to buy a single piece of equipment without needing to put all of your business assets up as security. Unlike a GSA, they don’t cover future assets – only the ones specified in the original agreement.
SSAs can be tricky because: You’ll be less likely to be able to borrow as much compared to a GSA. If you need enough cash for something significant, your financier might insist on a GSA instead.
Special note: If you have a GSA over your entire business and go to another lender for finance, the lender is likely to require that any assets held under the new SSA are excluded from the original GSA. In other words, you need to ask your first lender for permission to get the loan from the second lender.
A personal guarantee is when you secure your personal assets against your business loan. This can include the family home, investment properties, personally-owned business premises, cars, boats, stocks, shares and so on. You can find out more about these on our dedicated guide to personal guarantees.
Personal guarantees can be great because: You can use your existing personal assets to get capital for a business purpose, meaning you can rocket-boost a new venture if you already own valuable assets.
Personal guarantees can be tricky because: You are putting your personal assets at risk and these may need to be sold should your business need to liquidate some assets to cover the debts.
Special Note: Significant sums are usually covered by security against equity in a property specifically – the family home or an investment property. This comes in the form of a first mortgage, a second mortgage, or a caveat. Each of these provide different rights to the lender in descending order of ‘entitlement’, but work essentially the same way for the purposes of credit. If you are refused a mortgage for business purposes (either as a refinance or a new loan), a non-bank lender (like us) may be able to help with a caveat or second mortgage instead.
Offering security on a business loan is a great way to improve your risk profile, increase the amount you can borrow and improve your chances of having an application accepted. There’s a heap of choices for what that security looks like – whether it’s a broad general security agreement that uses your business assets, or a more specific security that uses the personal assets of a director or shareholder.
For more information about your choices in security and to get your business loan application started, get in touch with GetCapital on 0508 438 227 or contact us online.