There are a number of ways to secure your shareholder’s loan. The most common is to obtain a General Security Agreement. This is a document given by the company, pledging all assets of the company as security for repayment of your loan. This Agreement must be properly registered. In Ontario, for example, it would be registered under the Personal Property Securities Act. You should have it completed by your lawyer at the time of advancing funds, because even the slightest error could negate the registration.

This type of security is usually provided to support a documented loan agreement which would reflect the conditions under which the loan is being advanced, the rate of interest being charged, the terms of repayment, and the conditions under which you, as the secured lender, have the right to seize and dispose of the collateral to repay the loan. In the normal course of business, this documentation will have no immediate bearing on the company’s operations.

However, circumstances change. An unanticipated lawsuit could render the company insolvent. A dramatic reversal in the marketplace, or some other catastrophe, could suddenly change your focus to one of preserving your own personal position ahead of the company and its unsecured creditors.

Your company’s obligations to its unsecured creditors are as real as its obligations to its bank and yourself. There is nothing improper or immoral in establishing your priority position in this manner. The very fact that you are operating a “limited liability corporation” serves notice to your creditors that they are unsecured if the business fails. They always have the right to search under the Personal Property Securities Act and determine who is registered ahead of them.

They also have the right to demand security from the company before they sell to it on an unsecured basis. That is always a matter of negotiation. Creditors can obtain, for example, either a Purchase Money Security Interest in the specific goods being sold to you, or a General Security Agreement over all company assets.

When Trustees in Bankruptcy distribute liquidation proceeds to unsecured creditors, loans from shareholders are often included in the category of unsecured debts. As a result, it is common for shareholders to realize only a small pro-rata portion, if anything at all, out of the available funds.

In situations where the loans have been properly advanced and appropriate security has been pledged and registered, shareholders receive their money ahead of the unsecured creditors. And, in these instances, a shareholder loan is often fully repaid.

An additional benefit of properly securing shareholder loans arises when the company is facing financial pressures. Having a shareholder’s secured loan in place will sometimes allow certain reorganization options to be implemented, which would not be possible without the secured loan being there.

The point is that, for minimal cost, no matter how healthy the business is at the time of the loan, shareholders should always secure their loans to their corporations. Shareholders never invest money in their businesses with the expectation that the businesses will fail. Yet things change and some do not survive.

An investment in your business deserves the same care that you would apply to any other investment, and at least the same protection that a bank would require when lending to your business.