In nearly all matters where money is being borrowed or lent, security over assets will be required.
Security gives the lender the comfort that, in the event the borrower cannot repay the loan, the security can be enforced and the lender can recover the outstanding loan.
The most well known example of such security is probably where a residential property is purchased using a bank loan, and as security the bank is granted a mortgage of the purchased property.
In business, it is common for entities such as limited companies to borrow money and some of the methods of securing these loans are set out below.
Granting security over property (real estate)
Security granted in respect of land in England and Wales is usually by way of a legal mortgage (or charge), created in a deed.
Charges must be registered at the Land Registry (a public register), to take effect in law. The first legal charge to be registered on a property at the Land Registry will have priority over all other charges registered on that same property. So if the property is to be sold the proceeds of sale will be applied to remove the first legal charge first, and then the rest of the legal charges in the order that the legal charges were registered.
It is for this reason that the best and most secure type of security over a property is often considered a first legal charge; and in many cases a lender will refuse to take a second legal charge over a property.
What type of security can be used to secure all the assets of a Company?
A debenture can be used to secure the whole of a company’s assets and undertaking. One advantage of using a debenture is that you can take security over all of a company’s assets and undertaking in one document (as opposed to securing assets in individual securities).
A further advantage of using debentures is that the company (over which the debenture is over), can still use its assets in the normal course of business – the debenture will not prohibit the company from trading. This differs from legal charges (described above) which frequently require the borrower to obtain consent from the lender before they deal with any charged property.
It is not as common to see legal charges over real estate where money is loaned to a company. This is because most companies operate from leasehold premises which are limited in time (to say 5-20 years) and as a result have much less value than freehold premises.
Some lenders require personal guarantees from the directors of the borrowing company. A personal guarantee is entered into by the director(s) personally, which means that should the borrowing company not be able to repay its loans or otherwise fulfil its obligations to the bank then the director(s) will have to take the company’s place.
Directors who enter into a personal guarantee are putting assets that they own in their personal name at risk. These can include the family home, cars and certain household items. As a result directors must be given independent legal advice by a solicitor unconnected to the transaction.
What other assets can be used as security?
Security can be granted over other assets which are capable of being entered into a public register, such as: machinery and equipment, receivables, financial instruments (like shares), ships, aircraft and intellectual property.
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