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Securing of a Loan: Security Transfer Agreement

Key points and template

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Key Points included in This Security Transfer Agreement

Scope of the collateral
Conditions of use of the collateral by the borrower, including insurance provisions
Conditions of enforcement of the collateral and return of property

Use This Security Transfer Agreement if …

… you have granted a loan and the borrower transfers the ownership of certain assets to you as security for repayment

… the borrower needs to use the assets used as collateral and keep them in its possession

… you have taken out a loan and must provide the lender with the ownership of certain assets to secure its repayment

What is a Security Transfer Agreement?

Under this security transfer agreement, a borrower transfers the ownership of certain assets to a lender to secure a loan, while retaining the possession of the assets.

Unlike a traditional pledge, there is no transfer of possession of the assets. Hence the borrower can continue to use them, which is why this form of guarantee is widely used in practice.

However, because there is a risk of jeopardizing other creditors’ rights, there must be a good reason to do so. For example, this may be the case if the machines or production tools are used as collateral. The assets used as collateral remain in the lender’s ownership until full repayment.

If the borrower defaults on payments under the loan (for instance, it has failed to pay the interest when due), the lender may force the borrower to hand over the assets and realize them, mostly through a private sale. The sales proceeds are then set off against the amounts due by the borrower. This allows the lender to recover (at least part of) its losses and mitigates the borrower’s credit risk.