Posted: May 31, 2010
Written by: Adam Herstein
I know an accountant whose job is to try to save a business or get the most for its remains, when the business is facing serious financial trouble. A little while ago, he told me that a very simple, very smart thing a business owner can do is to secure the business owner’s loan(s) to the business.
Most business owners lend money to their businesses. Sometimes this is an ongoing lending and repaying back and forth. Other times, this is a more defined borrowing relationship, with a set amount loaned by the business owner to the business for a specific amount of time, with specific repayment terms.
However, a lot of business owners do not know that they can take the extra step of entering into a general security agreement with the business, whereby the business pledges its assets as collateral for repayment of the loan(s) made by the business owner to the business. The business owner would then file a registration in the Manitoba Personal Property Registry, registering the business owner’s financial interest in the personal property pledged as collateral for the repayment of the loan(s). Similarly, if the business owns land, the loan can also be secured by a real property mortgage.
By doing this, the business owner has become a secured creditor of the business. This gives the business owner preference over all creditors of the business who have not been granted such a security interest by the business, as well as all creditors who have been granted an inferior security interest. And sometimes, that is a great bargaining chip when all the other chips are down and a business owner is bargaining with unsecured creditors to take less than what they’re owed. That is, “if you don’t take what I’m offering you, you may get nothing, because my position as a secured creditor is superior to yours.”