General Security Agreement

A contract signed between two parties to secure personal loans, commercial loans, and other obligations owed to a lender

What is a General Security Agreement?

A General Security Agreement (GSA) is a contract signed between two parties – a creditor (lender) and a debtor (borrower) – to secure personal loans, commercial loans, and other obligations owed to a lender.

 

General Security Agreement

 

General security agreements list all the assets pledged as collateral to the lender and all possible events or conditions when the borrower is considered bankrupt, after which the collateral is repossessed by the lender.

 

 

Summary:

  • A general security agreement is signed by both sides: creditor and debtor.
  • A GSA is intended to secure a creditor’s interest and entitles the lender to access the collateral assets.
  • Assets that are registered under the GSA can be both tangible and intangible.

 

Purpose of the General Security Agreement

The main function of the general security agreement is to secure funds that were loaned to a business. Thus, to archive the security, all tangible and intangible assets that a company owns, or will own in the future, are described in the agreement.

Tangible assets include equipment, inventory, and machinery, whereas intangible assets include trademarks, patents, and intellectual property.

Both borrower and lender must sign the general security agreement. Additionally, the creditor may ask an individual or a corporation (e.g., insurance company) to sign as a guarantor. A guarantor is a person or organization that promises to pay back a loan if the borrower cannot handle it. After that, all security agreements need to be registered on the Personal Property Securities Register (PPSR).

 

Below a list of information that is necessary to provide for the registration:

  • Secured party details: Information on the creditor and debtor
  • Collateral details: Type of asset, its value
  • Grantor details: A grantor is a person or entity that creates a trust and transfers ownership of assets
  • Method of payment: Usually a credit card, but other types of payment can also be used.

 

Many banks use GSA when lending money to different entities.

 

What are the Debtor’s Obligations?

After signing the general security agreement, the debtor is obligated to perform the actions mentioned in the agreement, such as repay a certain amount to the lender, not allowing third parties to take any actions concerning the security of collateral without the lender’s convention, and not change the control of the company without the lender’s consent.

The creditor must approve the guarantor of the company, who will take responsibility for the outstanding loan amount in case the borrower defaults.

If the borrower defaults on the loan, the lender owns the right to first become a legal owner of the pledged assets and then to sell them in the open market to recover the borrowed funds.

 

What are the Main Elements of the General Security Agreement?

Typically, the main elements of the general security agreement include the following:

  • Definition of parties’ obligations
  • Grant of security interest
  • Guarantor information
  • Debtor covenants
  • Description of collateral
  • Events of default
  • Consequences of default
  • Remedies
  • Ownership of collateral
  • List of borrower’s assets
  • Miscellaneous

 

The GSA contract comes with a validity of five years. After five years, it becomes invalid and must be renewed every five years. It is very important to check all the information provided under the agreement regarding the presented items. If there are any mistakes, the GSA automatically becomes invalid.

It is impossible to use the assets that have already been pledged as collateral to secure a new loan agreement. All parties of the agreement should pay close attention to the details in the general security agreement to make sure every party is secured, and the information is legitimate and updated.

 

Additional Resources

CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.

In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional resources will be very helpful:

  • Comfort Letter
  • Credit Analysis Process
  • Debt Covenants
  • Quality of Collateral