Preference Agreement Meaning

Preference agreement is a contractual agreement between a borrower and lender that outlines the borrower`s preference in terms of the lender`s collateral. In other words, it is an agreement that establishes a priority ranking for the lender`s loans against certain assets.

Preference agreements are typically used in lending transactions where the borrower has multiple lenders. The borrower may have several types of collateral that they can offer, such as inventory, equipment, or real estate. With a preference agreement, the borrower can specify which assets are first in line for repayment if they default on their loans. This ensures that the lender with the highest priority in the preference agreement gets paid first.

Preference agreements are particularly important in bankruptcy cases. If a borrower declares bankruptcy, their assets are typically sold off to repay their lenders. The preference agreement determines which lenders get paid first and how much they get.

There are two types of preference agreements – perfected and unperfected. A perfected preference agreement involves the lender taking necessary legal steps to ensure their priority ranking over the borrower`s assets. An unperfected preference agreement does not involve any legal steps and is only enforceable if the borrower follows through with their preferences.

It is important to note that preference agreements are not the same as security agreements. Security agreements are contracts that give lenders the right to seize and sell the borrower`s collateral if they default on their loans. Preference agreements, on the other hand, only establish a priority ranking for the borrower`s assets in case of default.

In summary, preference agreements establish a priority ranking for a lender`s loans against certain borrower assets. They are particularly important in bankruptcy cases and can be either perfected or unperfected. Preference agreements should not be confused with security agreements, which establish the right to seize and sell collateral in case of default.