Other security: Overview, definition and example
What is other security?
"Other security" refers to any financial instrument or asset that is used to secure a transaction, loan, or agreement, which does not fall under more common types of collateral like real estate or traditional securities (stocks, bonds). It can include a wide range of assets, such as personal property, intellectual property, equipment, or even intangible assets that are pledged to guarantee the performance of an obligation. These securities can be used by borrowers to secure financing, or by parties in a contract to provide assurance of performance or repayment.
For example, a business may use its intellectual property rights, like patents or trademarks, as "other security" for a loan.
Why is other security important?
Other security is important because it allows parties to secure obligations and reduce risk by providing alternative forms of collateral. This can be especially valuable in situations where traditional assets (such as property) may not be available or sufficient to secure a loan or other agreements. For lenders, "other security" provides a form of protection against default, offering them a claim on the pledged asset if the borrower fails to meet their obligations.
For borrowers, using "other security" can increase the chances of securing financing or entering into agreements when more traditional collateral is not available. This flexibility is especially useful in industries like technology or entertainment, where intellectual property or equipment can hold significant value.
Understanding other security through an example
Imagine a small tech startup that needs a loan to fund product development. Since the company does not own real estate or have significant cash reserves, it offers its patents and proprietary software as "other security." The lender accepts these intangible assets as collateral, valuing them based on their potential marketability and the protection they provide against competition. If the company defaults on the loan, the lender has the right to seize or sell the intellectual property.
In another example, a contractor who needs a loan to purchase new construction equipment might offer the equipment itself as "other security." If the contractor defaults, the lender can seize and sell the equipment to recover the owed amount.
An example of an "other security" clause
Here’s how an "other security" clause might appear in a loan agreement:
“As additional security for the Loan, the Borrower agrees to pledge the following assets: [describe asset(s), e.g., intellectual property rights, equipment, inventory, etc.], as ‘Other Security.’ In the event of default, the Lender shall have the right to claim and liquidate the Other Security to satisfy any outstanding obligations under this Agreement.”
Conclusion
"Other security" refers to any non-traditional asset or collateral used to secure a transaction or loan. It broadens the range of options available for both lenders and borrowers, providing flexibility in securing financing or ensuring performance in contracts. By utilizing "other security," businesses or individuals can access the capital or agreements they need, even when traditional forms of collateral are not available, while lenders can mitigate the risk associated with lending.
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.