A security agreement is a contract that grants a security interest to a lender. This, on a certain asset that has been offered as guarantee or collateral in a financing operation.
In other words, the security agreement is a document that gives the power to a creditor to be able to take possession of the collateral granted by the debtor. This, in case of non-compliance with the repayment of the loan.
This security agreement, according to the sources that we have been able to review for the writing of the article, is typical of the US financial system.
At this point, it is also necessary to define what security interest means. This is the enforceable legal claim on an asset that has been pledged as collateral. This, usually within the framework of a loan.
For example, in the case of a mortgage, the collateral is the real estate itself that has been acquired thanks to said financing. Then, in case of non-compliance, since there is a security interest, the creditor has the power to take possession of the property and execute it to recover the credit delivered.
Importance of Security Agreements
The importance of security agreements lies in the fact that, without them, many financing operations would not be possible, due to the high risk involved.
The existence of a security agreement gives the creditor confidence that, in the event of default, he will be able to take possession of the collateral and sell it. That way, he can recover the borrowed money.
In this sense, thanks to the security agreements, more financing operations can be carried out. In addition, by reducing the credit risk, borrowers can access lower interest rates.
Characteristics of the security agreement
Among the characteristics of security agreements we can highlight:
- It is a contract that governs the relationship between the participants in a financial transaction. This, depending on the collateral offered.
- It falls under the laws of the United States.
- It can be offered as collateral not only tangible assets (such as real estate), but also intangible assets such as patents or accounts receivable.
- The borrower may allow the lender to keep the collateral in his possession. This, until the repayment of the loan.
- Businesses can offer as collateral assets such as inventory, furniture, machinery, accessories or the like. In such cases, the collateral being in the borrower’s possession, it cannot be removed from the business premises, unless this is necessary for the regular course of business.