Secured Lending & PPSA
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.
FAQs:
Secured lending is a loan in which the borrower grants the lender an interest in identified collateral so that on default the lender can realize that collateral in priority to unsecured creditors. The security lives in the security agreements; the priority lives in the registrations made against those agreements.
A PPSA registration is the public filing made under the Ontario Personal Property Security Act that perfects a lender's security interest in personal property collateral against third parties. A registered, accurately framed PPSA financing statement is what gives the lender priority on the borrower's bankruptcy or against a competing secured creditor; a missing or defective registration generally does not.
Yes. The PPSA captures both tangible personal property inventory, equipment, motor vehicles, and the like and intangibles, including accounts receivable, intellectual property, and contractual rights. Real property is secured separately by a mortgage or charge registered on the title.
Yes, in any commercial setting where the security is intended to be enforceable. The substantive risk is not in drafting the security agreement; it is in the registration architecture and the priority structure, both of which require Ontario-specific counsel and neither of which is forgiving of error.
The lender's options depend on the security documents and the applicable statutes. The typical sequence in Ontario begins with a section 244 notice under the BIA, followed by a private appointment of a receiver under the security or a court-appointed receivership where the situation requires it, and then realization on the collateral. The decisions made early in that sequence largely determine the outcome.
A general security agreement, or GSA, is the most common form of security agreement in Canada. It grants the lender a security interest over substantially all of the borrower's present and after-acquired personal property, both tangible and intangible. A GSA is typically supported by a PPSA registration to give the security interest priority against other creditors.
Perfecting a security interest is the legal step that makes it effective against third parties most importantly, other creditors and a trustee in bankruptcy. In Ontario, perfection is usually accomplished by registering a financing statement under the PPSA. An imperfect security interest may still bind the borrower but typically loses priority against other secured creditors.
In Ontario, a PPSA financing statement is registered for a chosen term, typically one to twenty-five years, or perpetually for certain types of collateral. The registration must be renewed before it expires or priority can be lost to later-registered creditors. Lenders should track expiry dates as part of post-closing compliance.
A fixed charge attaches to specific identifiable assets, equipment, vehicles, or real property that the borrower cannot freely dispose of without lender consent. A floating charge applies to a shifting pool of assets such as inventory or accounts receivable, which the borrower can deal with in the ordinary course of business until a default triggers crystallization.
A PMSI is a security interest taken in specific property to secure the loan or credit used to acquire that property. Under the PPSA, a properly registered PMSI typically receives super-priority over earlier-registered general security interests in the same collateral, making it a critical tool for equipment financing and inventory lending.
