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Commercial financing: Common security types

Commercial financingThe purpose of security in a commercial financing transaction is to give the lender comfort (or security) that the lender will have access to assets if the borrower fails to meet its repayment commitments.

The purpose of this article is to summarize the features of some of the more common security types used in commercial financing transactions. In any particular transaction, the security used depends on the asset types.

The following are common security types:

(a) Mortgage. A mortgage is the security type used in connection with land, and interests in land. In addition to typical land mortgages, mortgages can be used to secure interests in certain types of leases. We frequently see mortgages which are for a fixed amount of an advance, or for “all obligations” which work for a line of credit or revolving loan. Mortgages are registered in the Land Title Office, or in the case of mortgages of interests on First Nations Lands, in the Indian Lands Registry.

(b) Personal Property Security Agreement. Personal property is all property types which are not interests in land, and include equipment, inventory, cash, accounts and investments. The most common type of security agreement is a “general security agreement”, sometimes referred to as an “All-PAAP”, which stands for “all present and after acquired property”. This means that the security applies to everything the borrower currently owns, and everything which the borrower may own in the future. The other form of security agreement is a “specific security agreement”, which is limited to particular personal property. Specific security agreements are sometimes used to limit the security to a particular class of property or even a particular location (such as a project site). Special rules apply for serial numbered goods, like vehicles, and for consumer goods owned by individuals. Security agreements are registered in the Personal Property Registry.

(c) Guarantee. A guarantee is a promise by someone other than the borrower to be responsible for the debts owing to the lender at the time the borrower defaults on the loan. Often a guarantor will be an individual who is a shareholder in a corporate borrower, although sometimes the guarantor will be another more established company in a corporate group. Guarantees are not registered, although frequently lenders will require the guarantor to also grant a mortgage or a general security agreement to support the guarantee.

(d) Assignments and Postponements. Where the borrower is a corporation, the lender will frequently require that each of the shareholders of the corporate borrower sign a document that confirms that shareholder loans are assigned to the lender and the payment of any money which the shareholder may be owed by the corporate borrower will be delayed until after the lender is paid. Assignments and postponements are registered in the Personal Property Registry.

(e) Promissory Note. A promissory note is evidence of the debt to the lender.

Typically, a lender will require other agreements, reports and materials as a condition of advancing a loan. If you would like assistance in reviewing a Commitment Letter from a lender, or if you are a lender wishing to have a legal review of any security, please contact us.

By Andrea East, Pushor Mitchell LLP

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In addition to our regular guest bloggers, Inside Internal Controls blog published by First Reference, provides occasional guest post opportunities from various subject matter experts on the topics of risk management and best practices in finance and accounting, information technology, environmental issues, corporate governance, sales/marketing and operations, not-for-profits and business related issues in Canada. If you are a subject matter expert and would like to become an occasional blogger, please contact Yosie Saint-Cyr at editor@firstreference.com. If you liked this post and would like to subscribe to Inside Internal Controls blog click here.
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