A security agreement provides the secured party with a security interest in collateral in order to insure debtor's repayment. You may choose to include multiple debtors, secured parties, and co-signers depending on the requirements of the transaction. The information below will guide you through some of the important issues and considerations you will encounter when creating your security agreement.
Begin by adding the name and address of each debtor and secured party. If a party is a business, be sure to include the full legal name of that entity, such as "eDemand, Inc." If you include multiple debtors, each debtor will be "jointly and severally liable" under the agreement. This is legalese meaning that each debtor will be required to repay the full amount of the debt should another debtor default on its obligation. However, if a debtor is ever forced to pay back part of another debtor's portion of the debt, often that debtor will be able to then obtain a judgment in court against the defaulting debtor for the money it is owed. Joint and several liability will also apply if you choose to include one or more co-signers, discussed below.
Next, add the details of the transaction, including the principal amount owed, interest rate, and the date that interest will begin to accrue. When adding the interest rate, use the annual percentage rate (A.P.R.).
If the details of repayment are already included in a separate agreement—such as a promissory note or loan agreement—then simply indicate the name of the agreement and its effective date. If not, you may include repayment terms in your security agreement, including whether repayment will be made on a monthly basis, on demand of the secured party, or in a one-time lump sum payment.
You may choose to require a higher interest rate for any delinquent payments made after their due date. This will serve to help incentivize timely repayment.
Prepayment refers to the debtor's ability to repay the debt ahead of schedule. Often, debtors are prohibited from, or receiving a fee for, making prepayments because it prevents the secured party from receiving steady payments and from collecting a predictable amount of interest on the debt. If you choose to allow prepayment, you can then choose to require a fee for a percentage of the amount of the principal prepaid.
"Collateral" is any property owned by the debtor used to secure the debt to the secured party. For example, in a mortgage agreement the collateral is the house itself. However, collateral is often other types of property, such as the debtor's inventory, equipment, accounts payable, or real estate. If the debtor defaults on repayment, the secured party will be able to keep or sell the collateral. It is often also a good idea to require the debtor to maintain insurance on the collateral. The secured party will be allowed to require insurance against any reasonable risks associated with the collateral, such as fire, theft, damage, and other losses.
Lastly, you will be asked whether or not you want to include spaces for a notary and/or witness to sign. It is always recommended to include a notary to help prove the validity of the document should there ever be a question. For the same reason, including a witness is helpful. If possible, it is a good idea to include both.
It is common for security and loan agreements to include personal recourse provisions. Personal recourse provisions state that, if the debtor defaults on its payments and if any pledged collateral is insufficient to repay the outstanding principal and interest amount still owed on the loan, then the secured party can hold the debtor personally responsible for the payment.
Here you have the option to include one or more co-signers to guarantee the repayment of the debt should a debtor be unable to pay part or all of the outstanding debt. A separate co-signer agreement will automatically be included for each co-signer to sign along with the secured party and any notary or witness included.
As discussed above, each co-signer will be jointly and severally liable with each debtor and with each other co-signer for the full repayment of the debt. This helps assure that the secured party will be repaid first and in full, and then the other parties can sort out how much they owe each other after the fact, should the need arise.
After you are done filling out the form, simply have the debtor, secured party, and any notary and witness available sign the document. Again, although a notary and witness are not required in most jurisdictions, it is always a good idea to include them. When the document has been signed and witnessed, you are done! Make sure each debtor, secured party, and co-signer (if any) get a copy.
Three things must be present in order for the secured party to obtain a protected security interest in the collateral: 1) the secured party must pay for or give something of value in exchange for receiving the security interest, 2) the debtor must own the collateral or have proper authority over the collateral in order to pledge the security interest, and 3) the debtor must sign a security agreement. Once all three items occur, then the secured party will rightfully have a security interest in the collateral. This process is called "attachment" of a security interest. Assuming the first two items are present, the secured party should have an attached security interest when the debtor signs the security agreement.
Next, the secured party needs to "perfect" its security interest. This means that the secured party has taken steps to ensure that no other creditor has a prior claim over the collateral and that the secured party will be able to claim the collateral in the event that the debtor becomes insolvent or declares bankruptcy. While taking the step to perfect a security interest is not required by law, it is often the only way that the secured party can rest assured that its interest in the collateral is safe from other creditors.
You can perfect your interest by simply filing a short document, called a financing statement, in the debtor's state or local jurisdiction. If the debtor is an individual, this is the state where the debtor resides; if the debtor is a business, this is the state where the business was formed. While the rules vary by location, a financing statement normally only requires identifying the parties and providing a description of the collateral. In most states you can easily provide this information by completing Form UCC-1 and filing it with the Secretary of State's office. You can find your state's requirements online or by calling your state office.
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