What is a general security agreement on an acquisition loan?

On an acquisition loan, the lender usually wants a claim on the business it is paying for. A general security agreement, or GSA, is how it gets one over equipment, inventory, receivables and other personal property without listing each item. Land is handled under separate real property security rules. The agreement is only part of the picture, because the lender’s claim also depends on registration and on what other creditors already hold.

What a GSA can cover

Ontario’s Personal Property Security Act says a security agreement may cover after-acquired property, which is what lets a GSA reach equipment and inventory the business buys after the loan closes. The Canada Small Business Financing Program guidelines give a GSA as the example of security over any assets of the business, and require that kind of security when a program loan finances items such as software, leasehold improvements, intangible assets or working capital. Quebec uses a different instrument, a universal movable hypothec.

Registration and ranking

The lender registers a notice of its security interest in the provincial personal property registry. In Ontario that is done through Access Now, which also lets you search for liens. Where two security interests are both perfected by registration and no other provision of the Ontario Act applies, the Act ranks them by the order of registration, not the order of perfection, and a secured party may agree to subordinate its interest to another.

What a buyer should check

A seller’s existing lender may already hold a GSA with an after-acquired clause. The program guidelines show why that matters: where an earlier general security catches the assets being financed, the program lender must obtain postponements of rank so that its own claim is first-ranking. Search the registry under the seller’s legal name before closing, as described in what a PPSA search is, and ask your lawyer how each registration will be dealt with at closing.