Security Interests - The Basics

As a condition to getting a loan, a business is usually required to offer up assets as "security" (or "collateral"). The borrower signs a security agreement giving the lender the power to foreclose on the assets if the business defaults on the loan.

Examples of business assets in which lenders will take a security interest include:

• Personal property:
  • Equipment
  • Vehicles
  • Office furnishings
  • Inventory and proceeds from sales
  • Accounts receivable
  • Stocks
  • Crops
  • Patents, copyrights, trademarks and other intellectual property rights
  • "Choses in action" ( potential rights that have not yet matured, such as a claim in a lawsuit)
• Real property:
  • Commercial real estate
  • Interests in leases
  • Options to purchase
• Fixtures (improvements such as built-in cabinets that started out as personal property before becoming a part of real property)

Depending on the type of asset, there are different requirements for creating a security interest. With personal property, for example, the security agreement itself may be enough to create a security interest in collateral that is described in the agreement. Rules vary greatly from state to state.

In a business setting, a lender will want its security interest to have priority over other creditors.

With personal property, the lender files what"s called a "UCC-1 form" with the Secretary of State in the state where the collateral is located (and sometimes with local counties or townships, as well). This public record puts other creditors on notice that there is a lien on the assets that will have priority over any other security interests given on the same collateral.

With real property, lenders will insist on a mortgage or a deed of trust. The lender records this document in the county or township where the real property is located. In most cases, the first document to be recorded has priority over documents that are recorded later.

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