How to Limit the Security Offered to a Bank

When arranging finance, understanding what types of security a bank may request is crucial. The right structure can mean the difference between only tying up the financed asset and handing over control of your entire Balance Sheet.

Types of Security

Firstly, it is important to understand the different types of security a financier may request.

1. Security over a particular asset

This is the most straightforward and usually the most desirable. The bank secures only the item being financed – such as a truck, excavator, or piece of machinery. When the loan is repaid, the security is released.

This is commonly the case for most Chattel Mortgage contracts and Equipment Leases.

2. Director’s Guarantee

A personal guarantee from the directors and beneficial owners. Almost always required in most finance contracts. The guarantor is effectively guaranteeing that the business will repay the financier. If the business fails to make its repayments to the financier, the directors and beneficial owners are personally liable.

3. General Security Agreement (GSA)

A GSA gives the bank a charge over all the assets of your business—stock, debtors, equipment, cash, everything. This is a broad net and includes assets owned at the time of signing the contract, and any future assets acquired by the business.

This is a charge we fight the hardest to avoid as it effectively gives the financier the ability to take over and run your business in the event of a default.

A GSA is usually required for Working Capital Facilities. For this form of finance it’s appropriate as the financier is lending against the Balance Sheet and future business income.

4. 2^nd and 3^rd ranking mortgages

Some financiers will be willing to lodge a 2^nd or 3^rd ranking mortgage against a commercial or residential property you or your business owns, sitting behind your primary mortgage provider. If the property is ever sold, the proceeds pay out the primary mortgage provider and whatever is left is used to pay out those with a 2^nd or 3^rd ranking mortgage.

Strategically Structuring Finance to Minimise Security

Our general philosophy is that, where possible:

don’t provide one financier with security over all the business assets via a GSA, and
don’t provide security over property.

Doing so provides the financier with a significant amount of control over the business and often hinders your ability to obtain additional financing limits.

Therefore, separating finance through the below guidelines can minimise the control one financier has:

a range of financiers

2. The financier providing Working Capital Facilities is the only financier who should hold a GSA over the business.

3. Keep separate the financiers of Residential and Commercial Properties. Many of the major banks are happy to lend up to approx. 70% of the value of a Commercial Property, without requiring a GSA.

The Fine Print

Paying close attention to some key clauses that can be hidden in long and complex financier Terms & Conditions is pivotal. We are seeing financiers increasingly add the following clauses:

Caveats
Caveats can come in a range of forms. The below two are the most common we see:

2. Confirmation that the financier can lodge their security on any property or asset owned by the guarantor, if a default was to ever occur.

Negative Pledges
A negative pledge is a contractual promise that the business will not obtain any additional financing without the consent of the financier you are currently signing the contract with.

We are here to support your business.

Please speak to us about all things finance. Whether it be Equipment and Automotive Finance, Working Capital Finance which includes Debtor and Trade Finance, Property Finance including Construction Finance, Insurance Premium Funding. And yes, we also do Home Loan Finance.

We know that banks are becoming more selective and treating business customers worse than ever – please make us your first point of contact every time – we will get you a better outcome with a far better experience.