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Secured lending / PPSAs

Secured lending is a type of borrowing arrangement in which a borrower pledges collateral to secure a loan. A corresponding lien is established against the assets to provide collateral to the lender, ensuring that it has a legal claim to liquidate specific assets in the event the borrowing corporation defaults on the loan. Most major financial institution’s lending will be in the form of secured lending transactions.

Collateral can include both tangible assets (ex inventory, equipment, real estate, securities) and intangible assets (ex intellectual property, accounts receivable, contractual rights). The specific assets used as collateral depend on the nature of the borrower’s assets and the terms negotiated between the lender and borrower.

Secured loans typically have favorable terms for borrowers as compared with unsecured loans, including lower interest rates, longer repayment periods, and higher loan amounts. These favorable terms are a result of the reduced risk to lenders due to the presence of collateral. In the event of default, the lender has the right to seize and sell the collateral to recover the outstanding balance of the loan. This provides lenders with a level of protection against losses and reduces the risk of non-payment.

Secured lending transactions require legal documentation, including loan agreements, security agreements, promissory notes, and PPSA registrations in Canada (or UCC filings in the United States). These documents outline the terms and conditions of the loan, the rights and obligations of the parties involved, and the details of the collateral securing the loan.

A secured loan is probably the most common method of capitalization behind capital contributions on account of equity. If you are considering taking out a secured loan to fund your business operations, speak to one of our corporate lawyers about how we can assist with the documentation and registration.

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