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Security Agreements: Ensuring Payment with Collateral

posted Sep 6, 2012, 10:01 AM by Bryan Berson   [ updated Sep 13, 2014, 6:25 PM ]
One of the most important aspects of commerce is getting paid—promptly and in full. Security agreements are under-utilized devices that sellers can use to enforce their rights if buyers default on their obligations. (To clarify, here “security” refers to collateral, not stock or protection.)

Obviously, parties expect payment when they sell personal property, such as inventory or equipment. If they receive immediate, full payment, their concerns with regard to payment are over. Oftentimes, buyers pay a portion of the price upfront and the balance in installments. When sellers extend financing, customers become debtors. The buyer may sign a promissory note or credit agreement. When a small company buys an item, the seller may require an individual to sign a personal guarantee in case the company defaults. Still, the creditor is unsecured. If the debtor declares bankruptcy, an unsecured creditor may end up with little or nothing. Secured creditors are protected.

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