Borrowers often have a limited understanding of what assets may constitute security. The clauses in loan agreements can be far broader than what the every-day borrower may expect. Security may cover a wide scope of assets. Understanding what can and cannot be used as security is essential to assess risk before signing a loan agreement.
This article explains what assets lenders commonly take as loan security in Australia, which assets are usually excluded, and what borrowers should watch for before agreeing to a secured loan.
1. What is Loan Security?
Security is defined as any assets pledged to secure payment of a loan. If the borrower is unable to meet a loan obligation, i.e. they fail to make a repayment or breaches a loan term, the lender can take legal action. This means all assets agreed to as security (however broad that may be) can be taken control of, or used or sold by the lender to retrieve their money.
Security is specified in terms or clauses within the agreement, and may either be:
- Specific (over particular assets), i.e. a particular property or vehicle, or
- All-assets/general security (covering almost everything the borrower owns).
2. Assets Usually Taken as Loan Security
- Real Property
Real property includes all types of property including residential, commercial and industrial, such as owner-occupied property, investment properties and land. Mortgages are the most common form of security, where borrowers are obliged to meet obligations to maintain ownership and avoid repossession.
- Business Assets
Lenders often also secure loans against company-owned assets, including, but not limited to:
- Plant and equipment
- Vehicles
- Machinery
- Inventory or stock
- Fixtures and fittings
However, these assets are generally more likely to depreciate in value as compared to real property. This poses a risk to borrowers who rely on business assets as security – do not expect the lender to value this type of asset identically to what you bought it for when they repossess or sell it.
- Cash and Financial Assets
Financial assets can be deemed security in the form of cash deposits, term deposits, and occasionally share or investment portfolios. These can be frozen or applied directly onto the debt by lenders.
- Receivables or Contractual Rights
Lenders may also take security over a borrower’s receivables and contractual rights.
Receivables generally refer to money owed to a business, such as:
- Unpaid invoices
- Accounts receivable
- Ongoing payment entitlements under contracts.
Contractual rights can include a borrower’s right to receive income under existing or future contracts, such as service agreements, supply contracts, or long-term commercial arrangements.
This type of security can significantly affect cash flow, as funds that would ordinarily be used to operate the business may instead be redirected to the lender.
- All-assets or General Security
In business lending, lenders often require all-assets (or general) security.
This gives the lender rights over most or all of the borrower’s present and future assets, rather than specific items only. It may include property, equipment, inventory, receivables, intellectual property, and assets acquired after the loan is entered into.
Because of its broad scope, all-assets security can significantly increase a borrower’s exposure. It may restrict asset sales or refinancing and limit the borrower’s ability to obtain further funding. Borrowers should carefully consider the implications before agreeing to this type of security.
3. Assets That Usually Aren’t Taken as Security
While technically nearly all assets can be included, it is unusual or uncommon for the following to be taken as security:
- Personal household items (ordinary furniture, clothing)
- Tools of trade below certain values
- Assets not legally owned by the borrower
- Assets already subject to higher-priority security
- Certain trust assets (depending on structure)
4. Assets That May Be Indirectly at Risk
Even if an asset isn’t directly secured, it may still be exposed through:
- Personal guarantees
- Cross-collateralisation (where the same asset/pool of assets are used for more than one loan as security)
- Default interest and enforcement costs.
5. Why it Matters
Loan security can be broader than many borrowers expect, particularly where all-assets security, personal guarantees, or cross-collateralisation apply. Without a clear understanding of what assets are secured, borrowers may expose both business and personal assets to significant risk. Reviewing security provisions carefully and obtaining legal advice before signing can help avoid unintended consequences.
6. How OpenLegal Can Help Protect Your Assets
Loan security arrangements can be complex and far-reaching, particularly where all-assets security, personal guarantees, or cross-collateralisation are involved. Borrowers often underestimate how broadly security clauses can operate and the extent to which both business and personal assets may be exposed.
OpenLegal can assist by reviewing proposed loan and security documents, explaining exactly which assets are being secured, identifying hidden risks, and advising on options to limit or restructure security where possible. Obtaining legal advice before signing can help you understand your exposure, negotiate more appropriate terms, and avoid unintended consequences if financial difficulties arise.
If you are considering entering into a secured loan, or are unsure about the scope of security you have already agreed to, contact OpenLegal at enquiries@openlegal.com.au or 1300 937 574 for a confidential consultation to discuss your circumstances and the best path forward.
Steven Drk, Intern at OpenLegal
