What is a GSA Agreement in Australia? All the Information You Need
Understanding the financial and legal red tape and terms that surround financial agreements in Australia can be incredibly difficult, especially if you’re not a resident of the country.
Aussie expats can expect it to be tricky to understand terms like “tangible asset”, “intangible asset”, “personal assets”, “PPSR”, “grantor”, “collateral” … and the list goes on.
However, the red tape and dictionaries that you face aren’t going to be required. In this article, you’ll find out exactly what GSA, security agreement, security interest, and all of the words in the paragraph above mean.
So, if you’ve been wondering “just what is a GSA agreement in Australia?” read this article to get all the facts and information that you need!
What is a GSA agreement: Why are they set up?
GSA agreements are also known as general security agreements. They are security agreements that are set up by lenders to ensure that if a borrower defaults on their loan repayments, the lender obtains security and will be offered security interests.
If the debtor defaults or fails to pay, the secured party can claim personal assets from the borrower. They can claim intangible assets such as intellectual property and these GSA security agreements also include tangible assets, working similarly to some real estate security collateral, with the lender being able to claim what they’re owed by repossessing the secured property.
You might be returning from abroad as an expat and decide to take out a loan, or choose to apply for a business loan for an Australian business, so knowing the answer to “what is a GSA agreement in Australia” as an expat is important.
What are tangible and intangible assets for a general security agreement?
A tangible and an intangible asset are two different types of collateral used to secure personal loans, to secure commercial loans, or home loans, before a loan agreement is confirmed. Let’s look at some examples of each of these asset types to help us understand what is a GSA agreement.
Tangible assets for a general security agreement
Tangible assets can be defined as such assets that have an established, finite value and can be touched since they exist physically.
For instance, if you default on your business loan of $250,000 and your residential property is worth $245,000, (which is sometimes provided when applying for commercial property loans) this physical tangible asset (the residential property) can be used as collateral by the lender.
If you default on your business loan of $100,000, and you have computer equipment and machinery worth $85,000, these physical, tangible assets can be used as collateral by the lender.
Such assets classed as tangible include the following examples:
- Equipment—such as a computer
- Buildings—such as an owned business space or a property
- Machinery—such as a forklift or a crane
- Inventory—such as stock or items that businesses sell to customers
Intangible assets for a general security agreement
Intangible assets can be defined as such assets that don’t have a physical form and can’t be touched. These assets don’t have a monetary value so, although you might think cryptocurrency is an example of an intangible asset, this doesn’t count.
Examples of intangible assets that a lender might use as collateral include:
- Stocks and shares—such as the shares of a business or organization
- Intellectual property—such as a patent or a trademark, or a copyright
- Brand recognition
Why are intangible assets used for general security agreements?
Intangible assets are used for GSAs because they have potential value and can generate an income. Brand recognition, for instance, has value because customers might potentially want to purchase your products, which generates an income.
Intellectual property, such as copyright on a product, produces value because customers who value the brand can share this with other potential customers and thus generate revenue.
For example, if you have an Australian business as an Australian expat, but have to default on loan repayments of $800,000 and sell a patented idea to another business for $750,000, a transaction takes place and will be recorded. This can help lenders to settle debts with you as the borrower.
This long-term asset carries value to the lender and is therefore used for GSA agreements.
What is a GSA agreement: How do they work?
For the GSA agreement to be valid, and for it to work, both the borrower and the lender must agree to and sign the agreement. In the general security agreement, the pledged assets, both tangible and intangible, will be listed, counting as collateral.
Once agreed and signed, the general security agreement GSA should be recorded on the PPSR (the Personal Property Securities Register).
In a situation where an organization or business falls under the category of “receivership”, they must select a secured creditor and sell the organization’s assets—tangible or intangible—to clear the debt.
As mentioned, though, residential property is often used to secure loans and can count as collateral as well.
Which details are required when signing a general security agreement?
The key details that are crucial when understanding what is a GSA agreement, and that are required to sign a general security agreement, include:
- The details on the collateral. This includes the kind of asset it is (whether it’s tangible or intangible), and how much the asset is worth.
- The grantor’s information. In terms of a GSA agreement, a grantor is responsible for the transfer of the assets in terms of ownership.
- The method through which payments will be made. This is typically through credit cards, though it’s possible that different payment methods can apply.
- The details of the secured parties. Both the details of the lender secured party and the borrower.
PPSR: What is this and why is it important?
The PPSR, or personal property securities register establishes and facilitates the process that lenders follow to register and record security interests. This accessible register enables a secured party, either a borrower or a lender, to search and find out if any security interests have been registered.
To understand “what is a GSA agreement in Australia” the PPSR is critical because in situations where several different security interests have been registered to one asset, such as a mortgage, there is not sufficient equity available for all lenders. Therefore, the first, senior lender will gain the proceeds, and the remains will be split with other lenders.
General security agreement: What happens when they come into effect?
Part of the answer to the question “what is a GSA agreement?” is what happens when they come into effect, which is that if a business, borrower, or company defaults, the lender can initially take steps to reclaim the debt.
If you’re an Australian expat and cannot make the repayments for your business loan, the GSA agreement will cover which assets and steps can be taken to settle the debt, which lenders can choose to sell to cover the costs of the loan repayments.
What is a GSA agreement: A definition of “guarantee”
What’s also critical to understand when asking “what is a GSA agreement?” is understanding what is meant by “guarantee”, which is a written document and agreement that usually uses a type of collateral.
In the absence of such collateral, the lender will have to obtain personal guarantees and get these from the individual who has borrowed the money.
Personal Properties Securities Act: What is the PPSA in the context of a GSA?
The PPSA is an act that was passed in 2009. It is used to regulate security interests of personal property and ensures that the Australian state governments no longer have to consult the many types of legislation that stipulates creditors’ and borrowers’ rights.
General security agreements and business assets
One other aspect to consider when answering “what is a GSA agreement” is that general security agreements can apply to businesses that have applied for loans. What’s crucial for this are the intangible assets owned by the company.
In general security agreements, the lender will stipulate the tangible and intangible assets, including those future assets that the business might own. If the borrower defaults, financial institutions can use their security interest to reclaim the defaulted payments.
What is a GSA agreement for personal loans?
A general security agreement for personal loans secures the debtor’s obligations to the lender for a personal loan. A lender can obtain security just as they can with a business loan or a commercial loan, using tangible and intangible assets to secure the agreement.
Is it obligatory to sign a general security agreement as a borrower?
The short answer is that many lenders will request that you sign the general security agreement before approving your home loans, personal loans, or commercial loans. They will present you with the legal documents required for security interest, but it’s possible to avoid it with a flexible lender and under certain conditions.
Under which conditions might you be able to avoid signing a GSA?
Three conditions you might be able to avoid signing a general security agreement include:
- If you’re purchasing a commercial property, such as an office or rental unit (and not a restaurant or pub), as standard commercial properties can be sold more easily.
- If your loan is lower than $1,000,000—in which case you’ll sign an indemnity agreement or a G&I (a guarantee indemnity agreement). For example, if you took out a loan in Australia for $500,000 to start a business, in some cases you might not need to sign a GSA, especially if you have a secure and comprehensive plan for your business.
- If your financial position is secure and your credit history is good.
GSA agreements: Key factors to remember
When answering the question “what is a GSA agreement” remember that these agreements are usually about collateral. They’re agreements that give lenders security before a loan is agreed upon with a borrower.
Collateral can either be a tangible or intangible asset and in certain, very specific scenarios, you might be able to avoid signing a GSA.