When entering into a commercial finance agreement with a lender, they will often ask you to sign a General Security Agreement (GSA). Most people are so happy to have received an option for finance that they sign the document without proper consideration as to what this means for their business.
As the name suggests, all secured lending requires the borrower to provide security in order to gain finance approval on more favourable terms than if an unsecured facility was utilised. A GSA, or a Fixed and Floating Charge as it was previously known, is a security agreement that covers all the assets of the business (borrower), meaning the lender will have security over everything the business owns now and in the future. This generally applies to all property (other than land) and assets, including some that you may not have thought about e.g. water rights, licences, intellectual property, etc. If your business goes into receivership, the receiver may choose to sell the business and its assets to make up the lender’s losses.
Can you avoid having to sign a GSA?
Whilst in most cases the lender will require a GSA to be signed, there are certain circumstances in which you can negotiate with the lender to avoid it. Basically, the lender needs to be certain that they are protected should you default on your loan. For example, if you are purchasing a standard commercial property (i.e. those with broad appeal) on a low loan to value ratio (e.g. LVR of 30%), you would have a strong argument to be able to use only the property as security for the loan, rather than having to sign a GSA and allow the lender interest in all business assets.
Why should we think carefully before signing a GSA?
There are a number of key considerations that require deliberation prior to signing a GSA. The primary considerations include, but are not limited to, the following:
- Lenders will not want to sit in second when it comes to security, so you won’t be able to get finance with another lender if you have already signed a GSA. This can have a significant negative impact on the growth of your business.
- You will not be able to offer another person security over any of the business’s assets without first obtaining the lender’s consent. For example, you may need your lender’s consent before you open a line of credit with a supplier.
- There are times when you are risking more than you need to e.g. if you have already provided a residential property and commercial property as security, a GSA would generally be overkill.
Whilst you might be keen to sign whatever the lender wants in order to gain finance, it is important to consider the future ramifications of any term you agree to. Signing a GSA unnecessarily or failing to understand what it actually means can seriously inhibit your business. Before you apply for finance, consider the following:
- Consider all your options – don’t restrict yourself to the bank you are currently with.
- Take time to properly consider and understand the terms of the agreement.
- Seek advice from a professional – an accountant, financial adviser or commercial broker are key partners in the success of your business.