What security can a lender take over the business I am acquiring?

A lender financing an acquisition wants property it can claim if the loan is not repaid, and the law lets it take that claim in different ways for different kinds of property. What it takes depends on whether you are buying assets or shares, whether land is involved, and what other creditors already hold. A guarantee is a separate promise to pay rather than security over the business.

Business assets other than land

One instrument is a general security agreement, which the CSBFP guidelines give as the example of security over any assets of the business. The guidelines use the term universal movable hypothec in the context of Quebec’s Civil Code. Under Ontario’s Personal Property Security Act a security agreement may cover after-acquired property, so the claim can reach equipment and inventory bought after closing. In Ontario, a notice of security interest is registered through Access Now. Our page on general security agreements goes into the document itself.

Land and shares

Real property is secured by a mortgage, which the Ontario Act largely leaves outside its scope, with exceptions such as fixtures. In a share purchase a lender can take the shares as collateral, and the Act classes securities as investment property, which can be perfected by control. The CSBFP, however, will not finance buying shares, so a share purchase falls outside a program loan.

Guarantees and program limits

For a program loan, the guidelines let the lender take unsecured personal guarantees up to the original amount of the loan, and say a loan may be ineligible if a personal guarantee is secured by collateral assets, subject to stated conditions. Where the loan finances leasehold improvements, software, intangible assets or working capital, the lender must take security on other business assets, even if those assets are already subject to prior charges.

What other creditors already hold

Earlier registrations decide how much of the business the lender can really reach. Where no other rule applies, Ontario ranks security interests perfected by registration in order of registration, and, subject to stated exceptions, an unperfected interest ranks behind a perfected one in the same collateral. The guidelines require a program lender facing a general security agreement or hypothec whose after-acquired clause reaches the assets it finances to obtain postponements of rank, so a registry search under the seller’s legal name before closing matters.