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What Are Caveats, General Security Agreements and Guarantees?

As unsecured business loans from non-bank lenders grow in popularity, brokers supporting business lending will come across terms that describe the ways lenders protect their interests when providing finance.

It pays to understand that all lenders are not equal when it comes to specialist lending requirements.

Unlike mortgage lending, where the loan is secured by the property being purchased, unsecured loans don’t have specific collateral attached to them. 

Caveats, general security agreements and guarantees are among the ways that some lenders protect themselves in case of default by the borrower. And while caveats, GSAs and PPSR are used by other business lenders, these don’t apply in the Moula lending process. 

If a person is applying for a Business Loan from Moula on behalf of a company, a personal guarantee that the company will make its loan repayments is required. A separate personal guarantee is not required for sole traders, as their business is not a separate entity. 

Let’s take a closer look at these concepts and how they fit into the business lending process.

What is a caveat?

A property caveat is a legal notice that informs there is a legal claim on a property.  After recording a caveat, a note appears on the title that a third-party claims rights over the property. If a business defaults on a loan, the lender can seek a caveat on the borrower’s property. This way, the borrower won’t be able to sell their property until the debt is resolved and the caveat is removed.

A caveat loan is a short-term business finance option where property or land is used as security against the loan. A caveat is a legal document lodged by the lender on the secured property on the record of the land title and registry office of the state or territory.

What is a general security agreement?

Security agreements can be used to secure personal or business loans. A general security agreement (GSA) is often used in commercial lending. It enables a lender to access the assets of a business as collateral. With a GSA, the borrower has a security interest in all the borrower’s present and future assets. A ‘security interest’ is a legal right granted from a debtor to a creditor which gives the creditor recourse to assets if the debtor defaults on a loan.

The GSA includes personal assets, intellectual property and licences but doesn’t apply to real property. Before the Personal Property Securities Act 2009, a general security agreement was called a ‘fixed and floating charge’.

For this to come into effect, both the borrower and lender need to sign the GSA. After the GSA is signed, it must be registered on the government’s Personal Property Securities Register (PPSR).

What is the Personal Property Securities Register?

The Personal Property Securities Register enables lenders and businesses to register their security interests. Secured parties, buyers and other interested parties can search the PPSR to determine if a security interest is registered over personal property. There may be instances where there are multiple security interest rankings over the same asset (i.e. first, second registered mortgage). However, the subsequent security holders’ interest will be diminished as there won’t be sufficient equity left to cover the debts; proceeds will go first towards paying out the senior debtholder’s interest. Then whatever is left will go against second and third secured creditors.

How is a GSA used?

If a business defaults on a loan or goes into receivership, the GSA outlines what the lender can do to recover the debt. In case of default, the lender can sell the assets to repay the outstanding amount of the loan. If the business ends up in receivership, the receiver can sell the assets of the company itself towards satisfaction of the debt owed to a secured creditor.

The benefit of a GSA for the lender is that they don’t need to list every asset that’s being used as security. Another type of security agreement is known as a Specific Security Agreement. This type of agreement concerns a specific asset or assets. When this agreement is signed by both parties, it must also be registered with the Personal Property Securities Register (PPSR).

What is a guarantee?

A guarantee is a written agreement that a guarantor will take on the borrower’s loan payment obligations if the borrower defaults. If a loan isn’t secured with some form of collateral, lenders will require a personal guarantee from the borrower or third-party guarantor.

If a debt is co-signed by a third-party guarantor, the lender will want to be confident that the guarantor will be able to cover the obligations in case of default. At the same time, a third-party guarantor will want to be confident that the borrower will be able to meet their obligations for making loan repayments. Otherwise, the guarantor will be required to repay the loan if the borrower defaults on the loan.

How do guarantees apply to a Business Loan from Moula?

An individual guarantee is required when applying for a Business Loan from Moula, irrespective of the legal form of the applicant business.

If a person is applying for a Business Loan from Moula on behalf of a company, a personal guarantee is required. This is a written promise guaranteeing payment of the loan in the event the company the person is representing the company does not pay.

If someone is applying as a sole trader, they enter the loan contract in their own capacity and in the capacity as owner of the business you operate. They are personally liable for the debts of the business, so are personally guaranteeing the loan.

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