The General Security Agreement – Everything You Need to Know

A General Security Agreement (GSA) is a legal document that grants the lender a security interest in the borrower’s personal property or assets as collateral for a loan. Collateral could include inventory, equipment, accounts receivable, and more. However, it does not include real property such as land and buildings since there are unique laws for mortgages. 

In short, a GSA protects the lender by giving the right to seize and sell the collateral if the borrower defaults on the loan. In Canada, GSAs are governed by the Personal Property Security Act (PPSA) of each province.

A GSA is beneficial for both parties involved. For the lender, the option of legal recourse mitigates the risk in providing a loan. For the borrower, this could increase access to credit while offering flexibility in the type of collateral used. 

Key Components of a General Security Agreement  

The following are key elements of a GSA: 

Debtor & Secured Party – The debtor refers to the individual providing collateral to secure a loan. The secured party refers to the financial institution providing the loan while holding a security interest in the debtor’s collateral.

Collateral – The types of assets included in collateral are tangible, intangible, and future assets. 

Tangible assets are physical assets such as machinery, equipment, inventory, and more. 

Intangible assets are non-physical assets such as intellectual property, goodwill, accounts receivable, and more. 

Future assets are assets that the debtor acquires in the future, and the GSA can include a clause that includes these assets as part of the collateral. 

Security Interest – This refers to the legal claim on pledged collateral, which gives the secured party the right to possess and sell the collateral to satisfy a defaulted loan. 

Obligations Secured – The GSA will outline the obligations the debtor has to the secured party, which often include the principal amount of the loan, interest, applicable fees, and more. 

Perfection of Security Interest – This is an important component of the GSA because it legally establishes the secured party’s right to the collateral against third parties. Essentially, if there are other creditors that have claim to the collateral, this determines the priority of the secured party.

Default Provisions – The GSA will specify what happens in case the debtor defaults on the loan. This section includes default triggers, remedies, notice requirements, and rights and obligations. 

Default triggers are the conditions that put the debtor in default such as failure to make payments, insolvency, breach of agreement terms, and more. 

Remedies are the actions the secured party can take once the debtor defaults, which include seizing and selling the collateral and other legal actions. 

Notice requirements refer to the requirement the secured party has to notify the debtor before taking action, which offers the debtor an opportunity to remedy the default. 

Rights and obligations are the rights the secured party has to enforce the security interest and the obligations of the debtor to cooperate. 

Risks & Benefits of a General Security Agreement

While a GSA is meant to protect lenders in a situation where the borrower defaults on a loan, it might also come with a few challenges for both parties. 

Advantages & Risks for Lenders: 

  • Reduced Risk – This is the most obvious advantage for lenders when using a GSA. Having an option for legal recourse on a defaulted loan to recover the owed amount significantly mitigates the risk associated with lending money. 
  • Claim Priority – As explained already, a perfected GSA benefits the lender by ensuring priority when it comes to claiming specific collateral over other third party creditors.
  • Collateral Valuation – One of the challenges a lender faces with a GSA is the actual task of accurately valuing collateral. For example, tangible assets may depreciate while intangible assets can be difficult to assess. If the collateral is not valued correctly, this can increase the risk of loss for the lender.
  • Legal Complexities – Another challenge a lender faces is making sure all of the legal requirements are met to maintain the validity and enforceability of the security interest. The legal stipulations can be complex and will vary by jurisdiction, so it’s important the lender does the work to understand and comply with each law.  

Advantages & Risks for Borrowers: 

  • Lower Interest Rates – Since a GSA reduces the risk for lenders to extend credit, it often means the borrower can obtain a lower interest rate on the loan. 
  • Higher Loan Amounts – The reduced risk and presence of collateral also give lenders more confidence in the borrower’s ability to repay, which often makes them willing to offer higher credit amounts. 
  • Losing Collateral – The most obvious risk for the borrower when using a GSA is the potential loss of collateral if the borrower defaults on the loan. This is especially difficult if the collateral is a critical part of the borrower’s business operations or personal finances. 
  • Restrictions on Assets – Another challenge a borrower might face is the restrictions a GSA could place on how the collateral can be used. For example, the GSA might stipulate that the collateral must remain in good condition, can’t be sold without the lender’s consent, or must be insured. This could reduce the borrower’s flexibility in how the collateral is used. 

The Process of Creating a General Security Agreement 

Both parties should consult with lawyers who specialize in secured transactions to ensure the GSA complies with applicable laws and protects their interests. The basic process for creating a GSA includes the following steps: 

  • Negotiating the Details – This includes identifying the parties, defining the collateral, and outlining the security interest. 
  • Drafting the Agreement – This refers to writing an agreement with precise terms and conditions. These include defining what constitutes a default, outlining actions the secured party can take in case of default, specifying the notice requirements for default and the secured party’s actions, and stating the rights and obligations of both parties. 
  • Execution of Agreement – Of course, both parties must sign the GSA so that it can be legally executed. 
  • Perfecting the Security Interest – This step requires registering the GSA with the appropriate provincial Personal Property Security Act (PPSA) registry.

It’s important that both parties understand and document all relevant details to avoid future disputes and ambiguities. 

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Jul 2, 2024