Security Interest

A security interest turns an unsecured loan into a secured one. If the borrower defaults, the lender with the security interest can enforce it, typically by taking possession of the assets and selling them to recover the debt, ahead of unsecured creditors.

Security interests can cover many types of assets, including property, equipment, inventory, receivables, bank accounts, shares and intellectual property. A mortgage is a security interest over property.

For example, a company borrows 5,000,000 from a bank and grants a security interest over its machinery and inventory. If it defaults, the bank can sell those assets to recover the loan.

To be effective against other creditors, security interests usually must be registered or perfected under local law. In the United States, this is often done by filing a financing statement under the Uniform Commercial Code; in the United Kingdom, company charges are registered at Companies House. Priority among creditors often depends on the order in which security interests were registered.