Continuing security: Overview, definition, and example
What is continuing security?
Continuing security refers to a security interest or collateral that remains in place for an ongoing or future series of obligations. Unlike a one-time security arrangement, continuing security is designed to secure not only the specific debt or obligation it was originally created for but also any future debts or obligations incurred by the debtor. This type of security is commonly used in financial agreements to ensure that the lender or creditor is protected in case of multiple loans or credit extensions over time. A common form of continuing security is a general lien or a guarantee that covers future transactions, such as a line of credit.
For example, a company may grant a continuing security interest in its inventory to secure a revolving credit facility, ensuring that the lender is protected not just for the initial loan but for any future borrowings as well.
Why is continuing security important?
Continuing security is important because it provides a flexible and ongoing assurance to the lender or creditor that their interests are protected even if new obligations are created. It reduces the need for separate security arrangements for each new loan or credit extension, streamlining the process for both the borrower and the lender. For businesses or individuals, continuing security can provide access to ongoing credit facilities or loans without needing to create new collateral arrangements each time.
For lenders, continuing security mitigates the risk of non-payment or default by providing a lasting claim over collateral that can be used to recover outstanding debts. For borrowers, it simplifies access to additional credit or financing while ensuring that their relationship with creditors remains secure.
Understanding continuing security through an example
Imagine a business enters into a loan agreement with a bank, pledging its accounts receivable as collateral for the loan. The agreement specifies that the security interest in the receivables is continuing, meaning that the bank’s claim over the receivables will remain in place for future loans or credit advances the business may take out with the same bank. Each time the business borrows more money, the same collateral applies, without needing to pledge new assets.
In another example, a company may grant continuing security over its property to secure a line of credit. If the company borrows additional funds in the future, the same security interest in the property applies, covering the new debt in addition to the existing obligations.
An example of a continuing security clause
Here’s how a continuing security clause might appear in a financing agreement:
“The Borrower hereby grants the Lender a continuing security interest in all current and future inventory, accounts receivable, and other assets of the Borrower as collateral for the repayment of all existing and future debts, obligations, and liabilities to the Lender, whether now or hereafter arising under this Agreement or any other agreements between the parties.”
Conclusion
Continuing security provides an ongoing assurance to creditors that their interests will remain protected throughout the duration of a financial relationship, even as new obligations are incurred. It simplifies the process for both parties, offering the borrower access to continuous credit and protecting the lender’s investment over time. Understanding continuing security ensures that both lenders and borrowers are aware of their rights and responsibilities, and helps maintain a stable financial arrangement.
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.