Collateral, general security agreements and personal guarantees on Canadian business loans
What security a Canadian lender takes on a business loan, how a GSA and PPSA registration work, what a personal guarantee really commits you to, and what to negotiate.
On almost every Canadian small business loan the lender takes two kinds of protection: security over the business's assets, usually through a general security agreement (GSA) registered under the provincial Personal Property Security Act (PPSA), and a personal guarantee from the owners. The security lets the lender take and sell business assets if the loan goes bad; the guarantee lets it pursue the owners personally for any shortfall, which can reach your home and savings. Both are negotiable in scope, and the details matter more than the rate.
This guide is part of the small business loan requirements and rates overview. It is general information; get independent legal advice before you sign security or a guarantee.
The types of security
| Security | What it covers | How it is registered | Typical use |
|---|---|---|---|
| General security agreement (GSA) | All present and after-acquired personal property of the business: equipment, inventory, receivables, intangibles | Financing statement in the provincial PPSA registry | Most term loans and lines of credit |
| Specific security (purchase-money security interest) | A named asset, such as one machine or vehicle | PPSA registry, with priority rules for purchase-money security | Equipment loans and leases |
| Commercial mortgage or charge | Real property | Provincial land registry | Building purchases, refinancing |
| Assignment of book debts | Receivables | PPSA registry | Operating lines |
| Movable hypothec (Quebec) | Movable property, can be universal | Register of Personal and Movable Real Rights (RDPRM) | Quebec equivalent of a GSA; see Quebec differences |
| Cash collateral or term deposit | A blocked deposit | Pledge or hold agreement | Thin-file borrowers, letters of credit |
| Postponement of shareholder loans | Owners' loans to the company rank behind the lender | Agreement | Almost always on corporate loans |
A registration under the PPSA is public. Any later lender, supplier or buyer of your assets can search it, and a second lender will usually ask the first for an intercreditor or priority agreement.
How personal guarantees work
A guarantee is a separate contract between you and the lender. If the business does not pay, the lender can demand payment from you, usually without first having to sell the business's assets.
| Feature | What to look for | Why it matters |
|---|---|---|
| Limited or unlimited | A cap in dollars, or "all indebtedness" | An unlimited guarantee covers every debt the business owes the lender, including future loans |
| Specific or continuing | One named loan, or all present and future obligations | A continuing guarantee survives refinancing and new credit |
| Joint and several | Each guarantor liable for the whole amount | The lender can pursue the guarantor with the most assets |
| Secured or unsecured | Backed by a mortgage on your home or not | A collateral mortgage on your home is real security, not just a promise |
| Release terms | When and how the guarantee ends | Ask for release when the loan is repaid or ratios improve |
| Spousal guarantee | Whether your spouse is asked to sign | Spouses should get independent legal advice |
Under the Canada Small Business Financing Program, the cap of 25% on personal guarantees was removed in 2014, so a lender can now take a guarantee up to the original amount of the loan. BDC and banks set their own requirements.
Worked example (illustrative). Two partners each own 50% of a corporation that borrows $300,000. The bank asks for unlimited joint and several guarantees. If the corporation defaults and the equipment sells for $120,000 after costs, the shortfall is $180,000 plus interest and enforcement costs. Each partner is liable for the full $180,000, not $90,000. Negotiating each guarantee down to 50% of the loan ($150,000) and limiting it to this loan would cap each partner's exposure and keep it from spreading to future credit.
How security affects price and approval
Better security usually means a lower spread and more chance of approval. Lenders do not lend 100% of an asset's value; they apply an "advance rate". Commonly used ranges, which vary by lender and asset, are higher for real estate and receivables from creditworthy customers, lower for inventory and used specialized equipment, and very low or nil for intangibles such as goodwill. That is why working capital and intangible-asset loans rely more on guarantees and program support.
What you can negotiate
- A cap on the guarantee, ideally a fixed dollar amount or a percentage of the loan.
- Specific rather than continuing: limited to the named loan.
- Several, not joint, among partners, sized to ownership.
- No home mortgage, or a limited collateral charge on the home.
- Release triggers: on repayment, or when the DSCR or equity reaches a level.
- Carve-outs from the GSA for assets you will finance elsewhere, such as vehicles under a lease.
You have more leverage before you accept than after, and more with competing offers; see comparing two loan offers.
Before you sign: a checklist
- Read the guarantee as a separate document, not just the commitment letter's summary.
- Check which entities are covered: the borrower only, or affiliates too.
- Search the PPSA or RDPRM registry for existing registrations against your business, so there are no surprises.
- Ask how and when the lender will release its registration after repayment.
- Get independent legal advice; lenders often require a certificate of independent legal advice for guarantors.
The full set of documents to prepare is in the application checklist tool. If something goes wrong later, covenant breach and default explains how enforcement works.
Frequently asked questions
Can a lender take my house if I signed a personal guarantee?
A guarantee alone is an unsecured promise, but if you do not pay, the lender can sue, get a judgment and then enforce it against your assets, subject to provincial exemptions. If you also gave a mortgage on your home, the lender has direct security over it.
Does incorporating protect me from business debts?
It protects you from debts you have not personally guaranteed. Lenders know this, which is why they ask for guarantees.
Will repaying the loan end my guarantee automatically?
Not always. A continuing guarantee can survive as long as you owe the lender anything. Ask for a written release when the loan is repaid.
What is a "postponement and assignment of claim"?
An agreement that any loans you have made to your company are repaid only after the lender, and that your claim is assigned to the lender as extra security.
Sources
- Justice Laws Website — Bankruptcy and Insolvency Act rules on enforcing security
- Innovation, Science and Economic Development Canada — CSBFP security and guarantee rules
- Registre des droits personnels et réels mobiliers — Quebec registry of movable hypothecs
- BDC — guidance on security and guarantees for small business loans
