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What Is a Security Agreement?

Understanding security agreements, special considerations.

• Business Essentials

Security Agreement: Definition, Purpose, and Provisions

James Chen, CMT is an expert trader, investment adviser, and global market strategist.

A security agreement refers to a document that provides a lender a security interest in a specified asset or property that is pledged as collateral. Terms and conditions are determined at the time the security agreement is drafted. Security agreements are a necessary part of the business world, as lenders would never extend credit to certain companies without them. In the event that the borrower defaults, the pledged collateral can be seized by the lender and sold.

Key Takeaways

• A security agreement is a document that provides a lender a security interest in a specified asset or property that is pledged as collateral.
• Security agreements often contain covenants that outline provisions for the advancement of funds, a repayment schedule, or insurance requirements.
• These agreements may also pertain to intangible property such as patents or receivables.

Businesses and people need money to run and fund their operations. There are rarely cases where entities can fund themselves, which is why they turn to banks and other investment sources for capital . Some lenders require more than just good word and interest payments. That's where security agreements come into play. These are important documents drafted between both parties at the time the loan is advanced.

Security agreements often contain covenants that outline provisions for the advancement of funds, a repayment schedule, or insurance requirements. The borrower may also allow the lender to hold the collateral for the loan until repayment. Security agreements may also pertain to intangible property such as patents or receivables.

A secured promissory note may include a security agreement as part of its terms. If a security agreement lists a business property as collateral, the lender might file a UCC-1 statement to serve as a lien on the property.

A security agreement mitigates the default risk faced by the lender.

The existence of a security agreement and a possible lien on that collateral could affect the borrower’s ability to obtain more financing from other lenders. The property used to serve as collateral will be tied up with the terms of the first lender, which would mean that securing another loan against the same piece of property would lead to cross-collateralization.

Many lenders are reluctant to engage in arrangements that would put into question their ability to receive appropriate compensation if the borrower lapses into default . Business owners who seek financing from multiple sources can find themselves in challenging positions if borrowers require security agreements on their assets. Small businesses, in particular, may have few pieces of property or assets that can be used as collateral to secure loans.

The borrower may have limited options to provide collateral that would satisfy lenders. Even if a security agreement only grants a partial security interest in the property, lenders may be reluctant to offer financing against that property. The possibility would remain for cross-collateralization , which would force the property to be liquidated in order to attempt to unlock its value and provide compensation to the lenders.

Property that may be listed as collateral under a security agreement includes product inventory, furnishings, equipment used by a business, fixtures, and real estate owned by the business. The borrower is responsible for maintaining the collateral in good working condition in the event that there is a default. The property that is listed as collateral must not be removed from the premises unless the property is needed in the regular course of doing business.

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Everything You Need to Know about Security Agreements

As a business owner, you probably need access to credit. Some of your best options for obtaining credit probably involve securing your debt with collateral. This approach could help you obtain a lower interest rate, or credit in the first place.

If a creditor has security interest in your property, it will likely be outlined in a security agreement . This important contract should not be entered into without careful consideration, as a default could lead to harsh consequences. Below, we explore the essentials of security agreements along with several details you may not have considered.

Table of Contents

Why businesses enter into security agreements, article 9 of the ucc: governing security agreements, drafting a security agreement, describing collateral, types of collateral, attachment of a security interest, perfecting a security interest, filing financing statements, automatic perfection upon attachment, establishing priority, conditions of default, repossession, disposition, how to create a security agreement.

Secured transactions are vital to growing a business. Nearly all individuals and organizations need to take on debt at some point, but getting creditors onboard can be a struggle. Security interest provides reassurance to the creditor, who is then more likely to provide much-needed funding for a given debtor. Additionally, the debtor is more likely to obtain a low interest rate if some form of collateral is available to the creditor. Security agreements play a central role in this arrangement by outlining the terms under which debt can be secured, and what will happen if the debtor defaults.

Security interest is largely regulated via Article 9 of the Uniform Commercial Code (UCC) . This legislation provides uniformity across the lending industry while alerting both debtors and creditors to their rights. Over the years, Article 9 has become one of the code's most important elements. It applies to all transactions that create security interest in personal property.

At a minimum, a valid security agreement consists of a description of the collateral, a statement of the intention of providing security interest, and signatures from all parties involved. Most security agreements, however, go beyond these basic requirements. Many include covenants (or obligations of the debtor) and warranties (guarantees). Examples of covenants or warranties could include the following:

• The property to be used as collateral is currently free of outside liens.
• The debtor must notify the secured party immediately about changes in address.
• The debtor must notify the secured party if the property's value decreases or the property is somehow damaged.
• The property should not be wasted by the debtor.
• The debtor must keep the property in excellent condition.
• The property cannot be used in violation of any federal, state, or local laws, or in violation of an associated insurance policy.

Once the security agreement is created, it should be attached. To be deemed 'secured,' the agreement should be perfected. These terms are outlined in detail below. Additionally, the agreement should be authenticated, ideally before a notary or witness (or both).

As mentioned earlier, a security agreement cannot be deemed valid if collateral is not adequately described. Specifically, descriptions of collateral should not be overly broad or generic. An overly broad description might involve a blanket description or invoke 'all assets' owned by the debtor.

In general, descriptions of collateral should "reasonably [identify] what is described.” In the UCC, examples of a reasonable description include:

• specific listings,
• quantity of collateral,
• categories of collateral, and
• description by type.

The UCC acknowledges that description by type is not sufficient for commercial tort claims, commodity accounts, security entitlements, or consumer transactions.

A variety of tangible and intangible goods can be used as collateral. These include the following goods:

• Inventory (raw materials held by a business for sale or lease)
• Farm products (livestock, crops, or other goods produced via farming operations)
• Fixtures (items such as windows or doors that, if removed from real property, would require extensive reconstruction)
• Equipment (any goods other than inventory, consumer goods, or farm products)
• Accession (defined as any good so united with previously mentioned goods that the identity would be lost upon removal)
• Accounts (such as accounts receivable, promissory notes , or insurance policy proceeds)
• General intangibles (including some software rights)

Some security agreements include a middle ground of sorts: indispensable paper. Not exactly tangible or intangible, this involves any paper that is absolutely necessary for securing the value of tangible goods.

Floating liens may also appear in security agreements. This type of security interest may not be in the debtor's possession at the time of the security agreement's creation. A floating lien may involve after-acquired property, proceeds from the collateral's disposition, or future advances.

Attachment is a critical process for completing security agreements and obtaining security interest. Only upon fulfilling attachment requirements does the creditor become a secured party. To achieve attachment, the following obligations must be met:

• An exchange of value must occur. For example, a bank could exchange value with a debtor by providing a loan in conjunction with the security agreement.
• The debtor enjoys rights to the collateral. This could involve ownership of the collateral before the secured transaction or, in some cases, purchase of the collateral as part of the transaction. Often, a business will purchase inventory or equipment on credit and then use that same property as collateral.
• The debtor must authenticate the security agreement by signing a statement that announces the intention to grant a security interest in the property specifically outlined in the security agreement.

A commonly confused term, 'perfect' in the context of a security agreement does not mean that the document is free from errors. Rather, a 'perfected' security agreement ensures that a secured party can claim promised collateral in the event that the debtor declares bankruptcy.

The process of perfection is not required by law, but it remains an important step for those with security interest. Without perfection, it is impossible for secured parties to truly feel confident that the debtor's collateral is safe from other creditors.

How to Perfect a Security Interest

Several methods can be used to perfect a security interest. Most debtors and creditors file financing statements, but some pursue alternatives. The main options for perfecting a security interest are outlined below.

The typical approach to perfecting a security interest involves filing a financing statement. Sometimes confused with the security agreement itself, the financing statement provides notice of a party's security interest in a debtor. This document can alert third parties, but it cannot be used as substitute for the actual security agreement.

Rules for financing statements vary somewhat from one state to the next. In general, however, all parties involved must be identified in the document. Additionally, the financing statement should clearly identify collateral. These objectives can typically be fulfilled by completing Form UCC-1 with the Secretary of State in your region.

Financing statements are sometimes filed prior to the security interest attachment. Creditors often prefer this approach, as it can prevent a lag between attachment and perfection.

While most parties prefer to perfect a security interest via filing Form UCC-1, it is also possible to achieve perfection if the secured party possesses the collateral. The exception: possession does not apply to intangible property, such as accounts receivable. Because many debtors prefer to continue using or possessing collateral, this approach is not common.

If the debtor consents, the creditor may achieve perfection by taking control of the collateral. For example, the secured party may take over the debtor's bank account and handle funds therein, assuming the debtor and bank both agree. Control as a means of perfection often occurs with securities and other forms of investment property.

In select cases, perfection can be achieved the moment the security interest is attached. Typically, this occurs in conjunction with a purchase money security interest (PMSI) in which the debtor either purchases the item on credit from the secured party or the debtor receives a loan from the bank (which acts as the secured party) to purchase an item from a seller.

Often, a secured party's primary desire in filing a UCC-1 financing statement is to establish priority over other secured parties. Without a financing statement, perfection of a secured interest does not necessarily grant the perfected party priority over other third parties. If proper perfection is not achieved, the creditor may be given the status of 'unsecured creditor' in the event of bankruptcy.

Generally, priority is granted to the first secured party to successfully file a financing statement. After this, other parties could be referred to as the "second secured party" or "third secured party."

While priority can typically be achieved by filing a financing statement before other parties, exceptions exist. These include statutory liens, federal tax liens, and prior filings. Hence, even with perfection via financing statement, it is possible that competing claims could take priority.

Security agreements may outline the conditions under which a loan is considered in default. Typically, default occurs when the debtor fails to make agreed-upon payments on time. However, other conditions may also be instated, such as the following:

• The theft, improper use of, or substantial damage to the collateral
• The failure to abide by other covenants, warranties, or obligations outlined in the security agreement
• Evidence that covenants, warranties, or descriptions of collateral were false
• The issuance of garnishments, levies, or seizures with respect to the collateral
• Unapproved mergers or consolidations made by the debtor

Remedies for Defaults on Secured Loans

Article 9 of the UCC provides a variety of remedies for creditors attempting to recover losses from defaulted loans or other transactions, including the following:

Collection is one of the most common remedies for secured loan defaults. It applies to many forms of liquid assets (such as chattel paper and accounts receivable) and some intangible assets. This is an attractive solution for secured parties, as it allows for quick retrieval of owed funds.

When collecting on a defaulted loan, the secured party must behave in a 'commercially reasonable manner.' Essentially, this means that the secured party must offer the obligor notice of the collection.

Repossession can be a powerful option, as the mere threat of it may convince an otherwise negligent debtor to comply with the terms of the loan. Furthermore, repossession allows the secured party to recoup at least a portion of the value lost on the investment. However, repossession is typically only a temporary solution, as it may force the secured party to take on duties such as maintenance of the repossessed items. The debtor can redeem the repossessed property by repaying the loan or otherwise fulfilling obligations to the secured party.

Disposition typically involves the sale or lease of the property held as collateral. This frequently occurs via public auction but could also involve a private sale. As with collection, the secured party must provide notice of the intent to dispose of the collateral.

Because default is such a grave risk, debtors should be thoroughly aware of their obligations upon entering into security agreements.

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What Is an Assignment & Security Agreement?

by Brian Bass

Published on 26 Sep 2017

An assignment and security agreement is a contract that deals with the legal transfer of rights of ownership. Both an assignment and a security agreement are individual components of contract law. While an assignment and a security agreement can overlap, you should generally consider both of these legal concepts separate legal agreements.

Security Agreement

A security agreement is a part of contract law that covers financial transactions. These transactions, also known as secured transactions, involve a grantor promising collateral to a grantee. The security agreement in contract law does not cover actual land or real estate. Rather, a security agreement typically covers a vehicle, stock, livestock or some other form of personal property. In a security agreement, if the grantee already possesses the collateral, the grantor may secure the transaction verbally. However, a written security agreement is always preferable to a verbal security agreement in case of a disagreement between parties.

Assignment is part of common law that deals with transferring rights from one individual or party to another. The assignment agreement usually shows up in real estate dealings but can also exist in other contexts as well. However, an assignment is only the contractual transfer of benefits that have accrued or will accrue. With an assignment, the obligations do not transfer alongside the benefits. The obligations will always remain with the assignor. As with a security agreement, a verbal assignment while legally binding, does not provide either party with the legal protections of a written assignment agreement.

What the Agreements Cover

Both types of agreements, or one agreement including both an assignment and a security agreement, can apply to a range of property rights. For example, these agreements could cover the transfer of the rights to stock investments or the promise to use the stocks as collateral. It is also possible for these agreements to cover less tangible types of property. For example, these agreements could apply to creative rights, such as written works or a film production. In the case of creative rights, the benefits typically include future revenues earned from the sale or distribution of said works.

Drafting an Agreement

Although the parties involved may agree on each type of contract verbally, a written contract is always preferred. You can hire an attorney to draft a legal assignment and security agreement for you. However, there are also less expensive services that you can use to assist you in drafting your own contracts. For example, you can purchase software that uses a template to generate assignment and security agreements, or you could purchase a book or generic contract forms at your local bookstore. Unless you have specific legal knowledge about assignments and security agreements, however, you should always consult with an attorney before using any self-generated contract forms. Both assignment and security agreements are complex areas of contract law.

What Are Security Agreements? Explained with Examples, Types, and Considerations

Last updated 03/19/2024 by

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What is a security agreement?

Understanding security agreements, significance of covenants in security agreements, impact on borrowers: cross-collateralization and financing challenges, maintenance of collateral and default mitigation.

• Provides lenders with a legal claim on specified collateral
• Mitigates default risk for lenders
• Establishes a clear framework for borrower-lender relations
• Enables systematic resolution in case of borrower non-compliance
• Allows for financing against a range of assets, including intangibles
• May limit borrower’s ability to secure additional financing
• Potential for cross-collateralization
• Requires strict maintenance of listed collateral
• Can impact the borrower’s flexibility in managing assets
• May pose challenges for small businesses with limited assets

Frequently asked questions

How does a security agreement impact a borrower’s credit, can a security agreement be modified after it’s drafted, are there alternatives to security agreements for securing loans, can a security agreement cover future assets, what happens if a borrower defaults on a security agreement, key takeaways.

• Security agreements are vital in financial transactions, providing legal protection for lenders and borrowers.
• Covenants within these agreements outline provisions for fund advancement, repayment, and insurance requirements.
• Intangible assets, such as patents, can be included in security agreements.
• Cross-collateralization can limit a borrower’s ability to secure additional financing.
• Borrowers must maintain listed collateral, and removal is restricted without valid business reasons.
• Pros include systematic resolution, clear frameworks, and financing against a range of assets.
• Cons encompass potential limitations, cross-collateralization challenges, and strict collateral maintenance.

Show Article Sources

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Contract Assignment Agreement

Jump to section, what is a contract assignment agreement.

A contract assignment agreement is a document that transfers the contractual rights and duties of one party to another. The other party involved in the contract must agree to the terms of the transfer as well as they will now be in a contractual agreement with a different party.

Contract of assignment agreements must not violate any other laws or statutes in order to be enforced. The original contract must also allow assignments, or at least not explicitly prohibit them. Contract of assignment agreements cannot alter what is expected from the original contract.

Contract Assignment Agreement Sample

Reference : Security Exchange Commission - Edgar Database, EX-10.45 61 dex1045.htm ASSIGNMENT OF CONTRACT , Viewed October 27, 2022, View Source on SEC .

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Assignment Agreement Definition: Everything You Need to Know

The assignment agreement definition is a part of the common law that is in charge of transferring the rights of an individual or party to another. 3 min read updated on September 19, 2022

The assignment agreement definition is a portion of the common law that is in charge of transferring the rights of an individual or party to another person or party. The assignment agreement is often seen in real estate but can occur in other contexts as well. An assignment is just the contractual transfer of benefits that will accrue or have accrued. Obligations don't transfer with the benefits of an assignment. The assignor will always keep the obligations.

Security Agreement

A part of contract law that is responsible for financial transactions is a security agreement. These are also called a secured transaction and include a grantor that promises collateral to the grantee. In contract law, the security agreement doesn't cover actual real estate or land. Instead, this agreement covers stock, vehicle, livestock, or another type of personal property. In a security agreement, in the case where a grantee already has the collateral, the grantor can verbally acquire the transaction.

However, it's preferred to have a security agreement that is written down instead of having a verbal agreement, just in case there's a disagreement among the parties. Both a security agreement and an assignment may apply to a variety of property rights.

Example of Using Assignment and Security Agreements in Property Rights

As an example, the agreements may cover the promise to use stocks as collateral or to transfer the rights of stock investments. It may also be possible for the agreements to include properties that are less tangible. The agreements may apply to creative rights, such as film production or written works. If it is a case of creative rights, any benefits often include future revenue that may be earned from the distribution or sale of said works.

How Can an Attorney Help You?

You may want to hire an attorney to help you draft a security agreement and legal assignment. There are other services that you might want to use that don't cost as much but will still help you draft your contracts. The following are ways to save money while drafting a contract:

• Buy software with a template that creates security agreements and assignments.
• Buy a generic contract form at the bookstore.
• Buy a book with advice.

Unless your background includes knowing particular legal knowledge about security agreements and assignments, you'll want to talk to an attorney before you use any contract forms that are self-generated. Both security agreements and assignments are complicated areas of contract law.

Lease Assignment Definitions

An agent is someone who is licensed by the state where a property is established to aid in real-estate transactions such as leases , assignments, and property sales. An agent is usually either an attorney, sales agent, or real estate broker. The tenant from the initial lease is the assignor, and he transfers his whole interest to another person. The assignee obtains the lease interest from the assignor or original tenant and will become the new tenant.

Consideration is what the assignor gets from the assignee for transferring the lease interest to the assignee. The consideration is often a certain amount of money. Interests that other people hold are encumbrances, and they can affect the title and possibly the possession and use of the property by the assignee and the assignor.

If the property in question is a residential unit that's above a commercial property, the lease is considered to be a residential one, even though the property is in a commercial building. The governing law is that of the jurisdiction in which the property is located, no matter what jurisdiction the landlord, assignee, and assignor reside in. The assignee is allowed to receive a copy of the master lease. The assignor can either give the assignee a copy directly or include the copy with the lease assignment.

If the assignor isn't liable for the assignee's conduct, the landlord will need to go after the assignee if he or she causes property damage. However, if the assignor has liability for the conduct of the assignee, the landlord may then ask for compensation from both the assignee and assignor should the assignee cause any damage to the property.

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