Security in finance – it’s an area that doesn’t get much attention until it becomes an issue. However, if you don’t manage your security position proactively, it’s easy to discover that your ability to borrow has been reduced. It’s a common issue for business, so we thought we’d share some insight on how security works, how to make the most of your security position, and why security is so important to the potential of your business.
Quick takeaways if you’re in a hurry:
- As security for finance provided, lenders register a charge in the Personal Property Securities Register (PPSR) against one of your business or personal assets.
- Reviewing your security options before you sign any agreement is essential to protect your future position and ability to raise funds.
- It’s common for a security charge to remain registered against an an asset after the finance has been paid off – therefore it is important to check the PPSR to find and remove any old security charges lenders may have registered.
Read on: Security in finance: a practical guide
(estimated reading time: 5 minutes)
Unfortunately, none of us have a crystal ball to see into the future and plan for what it will bring. But even without a crystal ball, it is possible to follow some basic steps to ensure that you maximise the use of your assets and manage your security position with an eye to the future.
Security is quite simply the tool lenders use to protect their money when they give it to your business. This is done by registering a charge in the Personal Property Securities Register (PPSR) against one of your business or personal assets. There are different types of charges based on what the asset is, and charges are prioritised based on the date registered. This means that you can have more than one charge against an asset, but the charge registered first gets priority.
The details of exactly what assets you are offering as security will be in the security section of any lending or terms of trade agreement that you sign. If you weren’t aware of them, you are not alone. Remember to always get a lawyer to review any documentation before you sign it. The most favoured form of security is property, but security can basically be taken against anything that you or your business owns.
Setting up your finance
When you first set up your finance agreement with the bank, they will require security against the money they are giving you to start up and run your business. In an ideal world the bank would like property security, but they will probably try to take security against every asset that you have. It’s natural that the more security they have, the more comfortable they will be lending you money. Be proactive in reviewing your security options before you sign any agreement: this is essential to protect your future position.
We recommend that you try to keep debtors and stock apart from your agreement with the bank. The bank traditionally values these at 0-25 percent of their actual balance on your books. An alternative finance provider like Fifo Capital would value your debtors at up to 90 percent of their actual balance. This means that should you have a future requirement to borrow more money, alternative lenders may value your assets higher than the bank. In this scenario an alternative lender would be able to give you money where a bank might say no.
What lies ahead?
When the bank funds your business, it is usually based on the historic performance of your business, which can be quite an outdated picture – for example, business figures from 12 or 18 months ago. The bank also looks at the current status of the industry within which you operate, and the current position of the wider market.
All of these things will change as time passes. You will gain and lose customers. The industry may grow and decline, it could experience a boom or it could retract. The economy could be strong, or it could experience decline caused by internal or external factors. And any one of these changes could cause the bank to reassess it’s position with regard to your lending and your security.
When the change is positive the bank will probably increase your ability to borrow because it will be aware of the increased potential of your business. But unfortunately if the change is negative the bank could freeze or reduce your funding. Understanding and managing your security position with regards to these factors is essential; pro-actively managing your security position gives you the flexibility needed to account for changes in lending appetites and to protect your business.
Security essentials for all business owners
You may need finance for growth; to manage your costs while you deal with the loss of a customer; to support your business after a drop in prices or an increase in competition; or just to manage day-to-day operations. Whatever the reason, managing your security is key to keeping your finance options open. Here are two essential actions for any business:
1. Outdated security registrations: It is all too common for businesses to secure lending with an asset and pay back the facility, but then forget to check that the lender has lifted their registration against the asset. Run a check on your PPSR – if you find lenders registered against assets where the finance has been repaid, request that they be removed quick smart. Old registrations on assets have the potential to slow down your ability to raise money in the future.
2. Map your security: Review your finance agreements and create a working document of all the securities you have granted for finance that you are currently paying off; and also list the additional security options you have available.
Your security position is a business tool that, just like all other business components, needs a health check from time-to-time. If you’d like to find out more about the PPSR register or to check your registered securities, visit www.ppsr.govt.nz/cms. It is a good place to start to build a picture of your security position.
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