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What Is a Security Agreement?

A security agreement is a partnership agreement between the lender and debtor. It secures the lender's specified commercial asset or property that is used as collateral and conditions which it can be foreclosed. The collateral deposit can be in any form as long as it holds value whether it can be an inventory, furniture, or even private saving accounts. Allowing this, the debtor will feel secured about lending money to the trustee.

How to Write a Security Agreement

In order to guard your loan, a security agreement must be beneficial for the debtor and especially for you, the lender. A security agreement must identify the item or product that will be served as collateral or a default. Do you want to know how to make one? Simple. Below are provided guidelines as to how to write a security agreement.

1. Define the Heading

In the first part of your agreement, you must include the title of the agreement and then identify the lender and the debtor. Provide pieces of information like their complete name or company's name, address, and how to contact them. If you will lend money to an employee, let them provide an employment contract to verify.

2. Describe the Collateral

In the basic agreement, the lender must include that the lender was given the provision for the property or collateral. You need to include sufficient and general information about the property that will serve as loan collateral. For instance, if the collateral is a vehicle, you can ask about its make, model, or serial number.

3. Identify Obligations

You must secure your sake as the lender. In this step, you need to include the dating of the loan and the amount of the loan and it will be served as a promissory note to make sure that the debtor will pay the exact amount in the given date.

4. Set Restrictions for Collateral

If you have the authority within the collateral, you need to make sure that the debtor will not sell it. You should include a clause that prohibits the debtor to sell or transfer the ownership of the collateral. If not, then it is the loss of the lender as the debtor will declare a default in the agreement; the property is not in the lender's hands anymore.

5. Describe Collateral Maintenance

Just as you do not want the debtor to sell the collateral, you also do not want the value of the collateral to decline. In that case, you can include a clause stating that the debtor must take full responsibility for the maintenance of the collateral to maintain its value. In addition, you can also inspect the collateral's value.

6. Define the Default

A warranty is essential in a personal agreement. If the warrant presented by the debtor is wrong, the lender can sue the debtor. Also, explain situations that will be defined as default and that once the debtor defaults, you can now have the full responsibility of the property and it's up to you as to how you would benefit from it. For instance, if the collateral is a living thing like a bull, you can make a bull sell agreement to compensate with your loss if your debtor will not comply with the payment.

7. Finalize Your Document

To polish everything, insert a governing law in your simple agreement. You must clarify that the statements in your security agreement are enforceable in favor of both parties. Provide also a merger clause to ensure that a pre-agreement did not take place and all of the agreed statements are written in the document. Insert a signature block in the agreement to verify and seal the contract, and afterward, consult a lawyer to notarize it.