What is a security agreement?

A security agreement consists of a contract between a borrower and a secured lender. Each agreement explicitly specifies which assets are to be used as security and the conditions under which the lender would be allowed to foreclose on that property. Typically, security agreements involve business owners who hope to secure commercial loans. This agreement outlines obligations and rights for both the debtor and the creditor, while also highlighting the form the collateral will take and what will happen if the debtor defaults.

Collateral is any property or asset pledged by a debtor to secure repayment of a debt. It can take many forms, but generally involves some sort of property already owned by (or expected to be acquired by) the debtor. For example, in a mortgage agreement the collateral is the house itself. Under a security agreement, the debtor's personal property (non-real estate) and intangibles, such as intellectual property, are often used as collateral. Accurate classification of collateral is critical for security agreements. Often, classification depends on how exactly the debtor uses a particular asset. For example, a titled vehicle primarily used for personal or family purposes may be classified as consumer goods. However, if the vehicle is held for sale, it may be deemed inventory. If the vehicle is regularly used for business purposes, it should be classified as equipment. Other examples of collateral include inventory, equipment, machinery, farm products and crops, appliances, furnishings, fixtures, accounts receivable, deposit accounts, contract rights, and general intangibles. If the debtor defaults on repayment, the creditor (also called the secured party) will be able to keep or sell the collateral.

What is secured debt and how does it differ from unsecured debt?

A basic understanding of secured and unsecured debt is critical to grasping the scope and process of a security agreement. Many individuals and organizations take on both types of debt, but in different contexts. Secured debt is tied to an asset such as real estate or stock. This asset serves as collateral; fail to pay up, and the creditor takes possession of or otherwise uses the collateral. Common examples of secured debt include auto loans and mortgages. Such assets are never fully owned until the debt has been completely paid. Unsecured debt provides no rights to collateral for the creditor. If the debtor fails to make payments, then the creditor must take other steps, such as working with a debt collector or suing in hope of garnishing the debtor's wages.

Do I need to register my security interest with the state?

Registering a security interest with your state—known as "perfecting" the security interest—is normally recommended in order to ensure that there are no prior claims to the collateral and to protect the secured party in the event that the debtor becomes insolvent or declares bankruptcy. While taking the step to perfect a security interest is not required by law, it is often the only way that the secured party can rest assured that its interest in the collateral is safe from other creditors. You can perfect your interest by simply filing a short document, called a financing statement, in the debtor's state or local jurisdiction. If the debtor is an individual, this is the state where the debtor resides; if the debtor is a business, this is the state where the business was formed. While the rules vary by location, a financing statement normally only requires identifying the parties and providing a description of the collateral. In most states you can easily provide this information by completing Form UCC-1 and filing it with the Secretary of State's office. You can find your state's requirements online or by calling your state office. Certain types of collateral may be perfected without filing a financing statement and simply by the secured party having possession or control over them. However, filing a financing statement is usually recommended as the more straightforward method of ensuring the secured party's interest is fully protected.

What does perfection mean in regard to security agreements?

Perfection essentially involves granting third parties notice of a security interest's role in property. Perfection may vary based on whether property is deemed personal or real. A variety of methods can be used to obtain perfection in a security agreement. The following are among the most common: Filing a financing statement Possession of the collateral by the secured party or the secured party's agent Control over the collateral by the secured party Automatic perfection upon attachment

Security Agreement

This agreement is required in order to receive a security interest in collateral and may be used along with a financing statement if you wish to register your security interest with the state (known as "perfecting" your interest).

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Security Agreement

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Gather Information

As you complete your security agreement, you will need to provide certain relevant information. This includes the names and addresses of the parties, the amount and interest rate (if any) owed by the debtor, and collateral details. You may also need to include additional payment details, such as payment frequency, late fees, and prepayment requirements, if they are not already contained in a separate agreement.

Answer Key Questions

Use the information you collected to complete the security agreement. We make this easy by guiding you each step of the way and helping you to customize your document to match your specific needs. The questions and information we present to you dynamically change depending on your answers and the state selected.

Review and Sign

It is always important to read your document thoroughly to ensure it matches your needs and is free of errors and omissions. When signing the document, be sure to follow any additional instructions related to signing and witnessing the document. Also, although using a notary is not required, it is recommended that you do so to ensure that you can prove the authenticity of the document. When using a notary, be sure to wait to sign the document until they are present.

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