Security Agreements for Business Loans

Although there is no specific language or terminology that must be included in a Security Agreement, the following is a list of key provisions to consider:

• Identity of parties — debtor and secured party, including full names and addresses
• Description of collateral
• Property of security interest — first lien? second lien?
• Identify owner of collateral
• Value to be given by secured party to debtor
• Provisions regarding preservation of collateral, including secured party's right to inspect collateral; debtor's obligation to make it available for inspection by secured party; debtor's duty to protect, maintain, and repair collateral; debtor's right to sell, exchange, or dispose of collateral, etc.
• Limitations on secured party's right to assign security interest and debtor's right to receive notice of assignment
• Default provisions; rights to foreclose
• Provision for expiration of agreement on debtor's satisfaction of debts and provision that expiration of agreement terminates secured party's security interest
• Signatures of debtor (required) and secured party (if desired)

Perfecting by possession or filing a financing statement

If the debtor defaults on his or her obligation under the Security Agreement, the secured party must look to the collateral to satisfy the obligation. To obtain the maximum protection against the claims of third parties with possibly conflicting interests in the collateral, the secured party must perfect his or her security interest in the collateral.

Perfection will generally protect the secured party against creditors and transferees of the debtor. In general, to perfect a security interest, the secured party must either file a financing statement at the proper public office or take possession of the collateral.

Financing statement

Filing a UCC Financing Statement is the typical method of perfecting a security interest. The filing of this statement provides the necessary notice to third parties and creditors. The UCC Financing Statement typically can be obtained from the office of your Secretary of State. The statement is then filled out and filed in the appropriate public office, such as the Secretary of State or county recorder, depending on your state's requirements. Also, your business lawyer can provide you with the relevant forms. Each state might have particular requirements in this process.

Contents of the Financing Statement (UCC-1) include:

• Debtor's name and address
• Secured party's name and address
• Numerical identification of the parties (bank transit number, party's federal taxpayer identification number, or social security number)
• Description of collateral
• Signatures

Once the original Financing Statement is on file, the relationship of the parties may change for a number of reasons. Many of these changes can be stated on a Financing Statement Change Form (UCC-2). The following types of changes are included on the UCC-2:

• Continuation
• Partial release of collateral
• Termination
• Amendment
• Assignment by secured creditor

Since Financing Statements are a matter of public record, a certificate may be obtained from the Secretary of State or county recorder showing whether there is on file any financing statement naming a particular debtor, along with the time and date of the filing of any related financing statement. There will be a charge for the certificate, and you can also obtain a copy of the actual financing statement for an additional fee. This is the Request for Information or Copies Form (UCC-3).

For more information, check out AllBusiness.com's Business Loans Center.