Service Area: UCC Services

While Credit Insurance Companies Slash Coverage, Credit Professionals Shift Focus to UCC Filings

As the economy struggles to realign, businesses are scrambling and struggling to keep the supply chain in motion, but the financial risks are staggering. Sales teams are pushing for customers to have access to larger credit limits and credit teams are pushing back because the financial protections they once relied on have vanished. Suppliers have widely used credit insurance to protect their accounts receivable, but credit insurance companies continue to cut coverage and slash policies to maintain their own bottom lines. While insurance companies deliver crippling blows to businesses’ financial security, credit departments have been carefully reevaluating risk mitigation strategies, and it’s brought UCC filings into renewed focus.

Credit Insurance Turbulence

Credit insurance, also known as trade credit insurance or accounts receivable insurance, insures a creditor’s accounts receivable against a debtor’s nonpayment, insolvency, or bankruptcy. Credit insurance is a widely used, internationally accepted, risk resource and is commonly used in European and Asian countries.

When the economy is good, obtaining and maintaining credit insurance is reasonably uneventful. When the economy is bad, insurers start dropping marginal accounts and overall portfolios like a bad habit, leaving creditors unprotected.

The pandemic has truly taken its toll on all facets of the economy, including credit insurance. In difficult economic times, more businesses are going to fail; this means more insurance claims and more insurance payouts. I’ll let you in on the worst kept insurance secret: insurance companies are in the money-making business, not the money-losing business. So, to save the insurance company money, your policies are taking a hit. One source cited insurance coverage had been slashed by 15%, across all industries amid the pandemic, in an effort to balance their own books: “James Daly, CEO of credit insurer Euler Hermes North American, said his company has had to scale back coverage across all industries by 15%, including retail.”

15%! Can you afford the financial burden of lost coverage on your riskiest accounts? Are the high premiums you pay worth the losses you will incur because your coverage has been slashed?

UCC Filings, Your Security Interest Awaits

Article 9 of the Uniform Commercial Code (UCC) provides an opportunity for trade creditors to secure goods and/or accounts receivable by leveraging the personal property assets of their customer. Under UCC Article 9, a security interest is an interest in personal property or fixtures and secures payment or performance of an obligation. Before extending credit, many creditors require their debtors to enter into a security agreement. The debtor will pledge specific personal property as collateral to grant a security interest to the creditor. Then, in the event of debtor default, the creditor can use the collateral to recover payment. Typically, the collateral can be sold to reduce the debt. Then, any surplus proceeds belong to the debtor and, vice versa, any deficit is still an obligation of the debtor.

Included under the Article 9 umbrella are all forms of consignment and letter of credit payment rights that support the payment or performance of other collateral. Article 9 applies to leases if the parties intend that the lease provide security, as well as sales of account and chattel paper, including pledge, chattel mortgage, conditional sales, trust receipts, and field warehousing.

A Financing Statement is effective for 5 years (10 years in Wyoming), and if a Continuation is not filed timely, the Financing Statement will lapse, and the Security Interest will be extinguished. Once the debtor fulfills the obligation, a Termination should be filed.

Why UCC Filings?

Now, more than ever, you need to protect your receivables and it’s become too expensive and risky to pursue that protection solely through credit insurance. Yes, credit insurance may still be the best option for securing export (international) transactions, but domestically (plus Mexico, Canada, Australia & New Zealand) consider UCC filings or at least supplement credit insurance with UCC filings.

The Costs

The cost of filing a UCC is nominal compared to the premiums and deductibles of credit insurance. Credit insurance premiums may range between 0.2% – 0.8% of your company’s estimated annual sales. If your company sells approximately $10 million a year, the annual premium to cover the entire AR could be $20,000 – $80,000. UCC filings cost approximately $200 per filing and filings are in place for 5 years. With UCCs, you don’t have to deal with annual premiums, deductibles, etc. UCCs are a low-cost solution, ensuring you aren’t throwing good money away.

Pick & Choose

With UCC filings, you choose the accounts to secure, you set the risk threshold, you are in control. Credit insurance companies are in the business of making money – they aren’t charity organizations. You will be required to insure good accounts to justify insurance on the riskier accounts. This way the insurance company collects premiums on the accounts that are likely to remain solvent, to make up for the money they will pay out on the accounts likely to default.

UCCs Don’t Judge

Unlike credit insurance, UCC filings aren’t judgmental. A UCC isn’t going to cease simply because your customer’s risk profile changes. The state of Delaware isn’t going to contact you and say “Listen, we see your customer’s debt has grown, so we’re going to have to unperfect your UCC.” UCC filings will secure your receivables if you have properly perfected the security interest, regardless of your customer’s creditworthiness or the economic climate.

The Value of Public Record

Let’s not forget the immense value of the public record. Recording your Financing Statement creates a public record; it is a public acknowledgement of the financial agreement. This can be invaluable in a volatile economy. As an example, if you have filed a UCC and your customer decides to sell its business without telling you, that UCC is out there in the public record and can halt the sale, helping to ensure you are paid. Credit insurance doesn’t do that.

More Sales

As you know, the business world is aggressively competitive. UCC filing is more than reducing risk; it’s about the opportunity to expand your market, by providing you with the security needed to sell to marginal accounts and by providing the added security needed to increase existing clients’ credit lines. UCC filings create a competitive advantage.

Credit Insurance and UCC Filings

Credit insurance certainly has its place in the global economy. After all, it’s insurance, powered by actuaries who carefully evaluate risk, which alleviates the burden on your credit department to analyze and monitor accounts. But, for those supplying domestically, UCC filings offer the security needed to extend credit at a fraction of the cost. As insurance companies cut your portfolio coverage, perhaps you should consider supplementing coverage with UCC filings. Pay for and use the credit insurance for the amount the insurance company is willing to insure, then file a UCC to provide security on the outstanding balance. You don’t have to pick one or the other – it’s not credit insurance OR UCCs, it’s credit insurance AND UCCs.

Editor’s Note: This content was originally published 2020. It has since been updated and revised for 2023

Don’t Make These Top 5 Rookie Mistakes with Your UCC Security Agreement

The accuracy of your Security Agreement can make or break your properly perfected security interest. Compliance with Article 9 of the Uniform Commercial Code must be precise. Don’t fall victim to these rookie Security Agreement mistakes.

Note, today’s post focuses on the Security Agreement, but typically the information within the Security Agreement is the information that appears on the Financing Statement – at least it should be. It’s imperative for both the Security Agreement and the Financing Statement to be compliant.

Rookie Mistake #1: Getting the Debtor’s Name Wrong

I’m going to spend a bit more time on this mistake because it is, without question, the number one mistake made by secured parties: incorrectly identifying the debtor. UCC Article 9-503 specifically states if the debtor is a registered organization, the debtor’s name must be identified as it appears on the public organic record.

“…[i]f the debtor is a registered organization… the financing statement provides the name that is stated to be the registered organization’s name on the public organic record of most recently filed with or issued or enacted by the registered organization’s jurisdiction of organization…”

This means, list your customer’s name EXACTLY as it appears on the public organic record. If you pull Articles of Incorporation, and your customer’s name ends in “Incorporated” instead of “Inc.” then spell out Incorporated. Technically, Inc. is a noise word, but in one current case, the security interest was unperfected because of errors in the noise word. Be wary of spaces, punctuation and noise words – these seemingly small nuances are causing big problems for secured parties.

If the debtor is an individual, creditors must first look to the state’s legislation to determine whether to follow “Alternative A” or “Alternative B.” Most states enacted Alternative A, which states the debtor’s name should be listed exactly as it appears on the unexpired driver’s license.

Alternative A: if the debtor holds an unexpired driver’s license, the Financing Statement must list the debtor’s name as it appears on the unexpired driver’s license. (If the debtor does not have a driver’s license, the Financing Statement should list the “individual name” of the debtor or the debtor’s surname and first personal name.)

Alternative B: the debtor’s driver’s license name, the debtor’s actual name or the debtor’s surname and first personal name may be used on the Financing Statement.

Most recently we have reviewed several cases in which a seemingly tiny mistake has left a creditor’s security interest unperfected. Don’t get caught in the complacency trap!

Popular question “What should I do if my customer’s name changes?” Article 9 – 507(c) provides a 4-month window to amend a filing for a debtor name change that may be considered “seriously misleading.” If the change in your customer’s name makes the filed Financing Statement “seriously misleading,” UCC Section 9-507(c) states the Financing Statement will only be effective for collateral acquired prior to the name change or within four months following the change.

As a best practice, we recommend amending your UCC filing if your customer’s name changes. There may be situations where an amendment is not “required,” but it’s a risk to not amend. If you are unsure whether you want to amend your filing, I would recommend you determine whether the name change renders your filing as seriously misleading.

Rookie Mistake #2: Failing to Include the Granting Clause

Security interests under Article 9 are consensual. This means your customer must agree to grant you rights to the collateral. If your Security Agreement does not include a granting clause, it isn’t a Security Agreement.  The granting clause does not need to be fancy, embellished with extraneous words or phrases.

Here’s an example of a granting clause “In consideration for the extension of credit, Debtor hereby grants a security interest in and assigns to the Secured Party the Collateral described in paragraph II below to secure payment and performance of all debts, liabilities and obligations of Debtor of any kind whenever and however incurred to Secured Party.”

Rookie Mistake #3: Not Clearly Identifying Collateral

Crafting a clear collateral description that isn’t too specific or too vague can be challenging. Article 9 clearly states a “supergeneric” description is insufficient. In other words, to simply identify the collateral as “all the debtor’s assets” or “all the debtor’s personal property” is unreasonable. OK, so what is reasonable? Article 9-108(b) provides the following “examples of reasonable identification”

Except as otherwise provided in subsection (d), a description of collateral reasonably identifies the collateral if it identifies the collateral by:

(1) specific listing;

(2) category;

(3) except as otherwise provided in subsection (e), a type of collateral defined in [the Uniform Commercial Code];

(4) quantity;

(5) computational or allocational formula or procedure; or

(6) except as otherwise provided in subsection (c), any other method, if the identity of the collateral is objectively determinable.

You can review some of our posts on collateral here.

Rookie Mistake #4: Missing Dates & Authorized Signatures

I list these two together because generally, when we sign documents (any documents), we sign and date. The same should apply for the Security Agreement: sign and date. Like peanut butter & jelly: sign and date. Have I repeated enough? Sign and date.

It’s vital the document be signed by a person authorized to grant the security interest. Make sure the individual signing the document has been authorized by the company to sign.

Rookie Mistake #5: Neglecting to Reference Governing Law

This is easy to overlook, especially when it can amount to a brief sentence buried within the pages of a document.

“This security agreement will be governed by the laws of _________ (state).”

Mistakes Eliminate Security

Mistakes happen, and they come at a cost. Article 9 leaves virtually no room for error and one slight misstep can leave you with an unperfected security interest and sitting in a sea of unsecured creditors. Carefully draft, review & re-review your documents to ensure you avoid these rookie mistakes.

*Editor’s Note: This content was originally published in November 2018. It has since been updated and revised for statute changes effective 2023.