Secure Your Knowledge of Secured Interests

When a business borrows money, especially when it’s a new business, the lender wants to make sure it will be repaid even if the business fails. The lender often seeks additional security that it will be paid. Additional security can be the personal guaranty of the owner, a deed of trust on real estate or a lien on personal property. It is important for business owners to understand what they are signing when they borrow money.

Personal Guaranty

In a personal guaranty, the business owner (shareholders, members or partners) signs a contract to be responsible for payment of the company’s debt. This contract must be in writing, and is often notarized. Guaranties may allow the lender to seek payment directly from any individual guarantor without having to ask everyone or sue the company/debtor. If only one guarantor ends up repaying the loan, that guarantor may seek contribution from the other guarantors for their share of the debt. This may involve a lawsuit between business partners.

Deed of Trust

In a real estate deal, the lender is often secured by a deed of trust, which pledges the real estate as collateral for the debt. If the debt is not paid, the lender can foreclose on the land and sell it to recoup the loaned amount. This may be the sole remedy of the lender, or the lender could also sue the company for any deficiency after the commercial foreclosure sale. It is possible for the owners to be asked to sign personal guaranties as well as granting a deed of trust.

UCC Lien

Finally, if the business has equipment, inventory, accounts receivable and similar personal property, the lender may ask for these assets to be pledged. The lender will file a Uniform Commercial Code (UCC) financing statement with the Secretary of State and/or the Register of Deeds in the county where the goods are located to give notice that the assets are pledged. If the debtor defaults, these assets can be seized and sold to pay off the debt. The business or its assets cannot be sold free and clear until the loan is paid and the UCC lien released.