As business owners it is possible you may at some stage wish to borrow money. This could be to fund a refurbishment or purchase of a new premises, for capital working requirements or even to service an existing debt. Thankfully over the last couple of years high street banks have been more willing to lend and this is where the majority of loans come from. However, alternative finance providers are also very much part and parcel of the lending industry nowadays. Whatever the lender, the principles remain the same and they will require security over your assets in order to protect their lending. So while there is obviously a financial and accounting side to any borrowing you may take out, there is also a very important legal aspect and this article intends to explain the main forms of security which you may be asked to sign up to.
A legal mortgage or charge is a fundamental piece of security required by a lender and is the method by which a lender will enforce their right to a property. A legal mortgage or charge will be granted over a property owned by the borrower or a related party such as a director or shareholder. The effect is that should the borrower fail to pay the loan, the lender may enforce the charge, take ownership over the property and sell it to recoup the loan monies owed to it.
A debenture can be given by a company only. A debenture is an agreement between a borrower and a lender laying out the terms and conditions on which the borrower agrees to pay back the amount owed. The lender is granted security over the company’s assets in the event that the borrower fails to repay the loan. Usually a debenture will include a ‘fixed and floating charge’ over the assets and undertakings of the company meaning it covers any fixed assets (land, buildings, machinery etc) and floating assets (inventory, cash, accounts etc).
Both companies and individuals can grant guarantees. By signing a guarantee, the guarantor agrees to repay the lender in the event that the borrower fails to do so. Typically directors or shareholders of companies might be required to guarantee a company’s borrowing or where larger companies are involved, the parent company might have to guarantee the obligations of the subsidiary company.
Alternative forms of security
In addition to the above, there are various other forms of security required by lenders from time to time depending on the circumstances of the borrowing including for example assignment of a life policy, assignment of rent, charge over a liquor licence (for a licensed premises), subordination agreement.
The decision to sign up to bank security is an important one and should not be taken lightly. It is highly advisable legal advice is taken before you enter into such agreements and in many cases lenders will require you to do so.
Should you wish to discuss any points raised in this article or should you wish to discuss this topic generally, please contact the Commercial Department at O’Reilly Stewart on 90 321 000.