Additional security: Overview, definition, and example
What is additional security?
Additional security refers to any extra form of collateral, guarantee, or assurance that a borrower or contracting party provides to strengthen their commitment to fulfilling financial or contractual obligations. It is often required when a lender, creditor, or counterparty seeks further protection against the risk of default or non-performance.
For example, if a business takes out a loan but its financial position is uncertain, the lender may require the business owner to provide additional security, such as a personal guarantee or an extra asset as collateral.
Why is additional security important?
Additional security is important because it reduces risk for lenders, investors, and counterparties in contractual agreements. It ensures that if the borrower or party fails to meet their obligations, there are alternative means to recover losses.
For businesses, providing additional security can help secure financing, improve credit terms, and increase trust between contracting parties. However, it also means taking on more risk, as failure to meet obligations could result in the loss of pledged assets or guarantees.
Understanding additional security through an example
Imagine a small business applies for a bank loan but has limited credit history. The bank agrees to lend money but requires the business owner to provide additional security in the form of a personal guarantee. If the business fails to repay the loan, the bank can claim the owner's personal assets to recover the outstanding amount.
In another scenario, a supplier enters a contract to provide goods to a retailer on credit. To mitigate the risk of non-payment, the supplier requests additional security in the form of a standby letter of credit from the retailer’s bank. If the retailer fails to pay, the bank will cover the owed amount.
An example of an additional security clause
Here’s how an additional security clause might appear in a contract:
“In the event that the Lender determines that the Borrower’s financial position has materially changed, the Borrower shall provide additional security as requested by the Lender, including but not limited to personal guarantees, liens, or additional collateral, to ensure continued compliance with the terms of this Agreement.”
Conclusion
Additional security serves as a safeguard in financial and contractual agreements, providing lenders and counterparties with extra protection against default or non-performance. While it enhances trust and access to financing, it also places greater responsibility on the party offering the security.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.