Commercial Credit Management Tips for 2020
Commercial Credit Management Tips for UCCs
Tip #1: Timely File Your UCCs
You should always file your UCC-1 before you ship goods to your customer. As soon as you have the signed Security Agreement, file your UCC to ensure you’re a secured creditor. To properly perfect your security interest, you must understand the different types of UCC filings and the respective filing deadlines. Failure to meet deadline requirements may jeopardize your position as a secured creditor.
- PMSI in Equipment (US Filing)– the UCC-1 must be filed no later than 20 days from the date your customer receives the equipment.
- PMSI in Equipment (Canadian filing)– the PPSA must be filed no later than 15 days from the date your customer receives the equipment.
- The definition of “receipt” is hotly contested in courts; to be most conservative, NCS calculates based on the date you first shipped equipment to your customer.
- PMSI in Inventory or Consignment– the UCC-1 must be filed, a reflective UCC search performed, and notification letters should be sent and received prior to shipping inventory to your customer. Shipping inventory before you’ve completed these steps may result in an unsecured status.
- Blanket– the UCC-1 should be filed prior to shipping goods to your customer.
Tip #2: The Proper Time to Terminate a UCC Filing
When should you terminate the original UCC Financing Statement? Section 9-513 of the Uniform Commercial Code states that a secured party must terminate a UCC filing within 20 days of a request from the debtor if any of the following exist:
- There is no obligation secured by the collateral and no indication there will be a future obligation
- The financing statement covered consigned goods that are no longer in the debtor’s possession
- The debtor never authorized the filing of the original financing statement
Otherwise, the UCC filing will remain active until the 5-year lapse date. This can cause financial complications between the debtor and their bank. NCS Tip: Terminate your UCC filings in a timely manner.
Tip #3: Understand the Difference Between A Corporate Certificate and Articles of Incorporation
The UCC 2010 Amendment changes to Article 9 regarding the debtor name state that when filing a UCC on a registered organization, you must review the “public organic record” (i.e. Articles of Incorporation) to verify the entity legal name including any amendments and reinstatements.
The state’s public record (Corporate Certificate) is a representation of the public organic record that has been data entered. This is insufficient because there can be clerical errors in the name that could deem the UCC filing seriously misleading and may leave you unsecured.
Tip #4: Monitor for Name Changes
Are you aware that if your customer changes their name you must amend your UCC Filing or your security is jeopardized? Section 9-507 (c) of the UCC tells us that we have 4 months to amend our UCC filing when the debtor name changes. If not amended, the UCC filing is not effective to perfect a security interest in collateral acquired by the debtor before or within four months after the change. Make sure your Security Agreement requires the debtor to advise you of any changes to name, address, or organizational structure. It is the secured party’s responsibility to ensure the UCC filing is updated and contains the correct information. Best practice is to monitor your customer for change.
Tip #5: Maintain Priority in Inventory
When continuing a Purchase Money Security Interest in inventory filing, be aware of the requirement to re-notify the previously secured creditors. Section 9-324 of the Uniform Commercial Code outlines the requirements to establish priority in inventory. It states that the secured party must send notification to the holders of any conflicting security interests, and that the holders of these conflicting security interests receive the notification within five years before the debtor receives possession of the inventory. This means in order to maintain priority upon continuation, all previously secured parties will again need to be notified. Failing to do so will jeopardize your priority position in your goods. NCS Tip: Make sure you are searching and notifying when you continue your PMSI UCC Filings
Tip #6: Protect Your Inventory with Warehouse Filings
Are you storing your inventory in a third-party warehouse? If so, you should file a UCC-1 Financing Statement to publicly announce your ownership. Under Article 7 of The Uniform Commercial Code, the warehouseman may have a lien against your inventory. If the warehouseman’s business were to fail, their bank may unknowingly liquidate your inventory. Filing a UCC-1 Financing Statement will let everyone know who the inventory belongs to and keep your interest safe.
Tip #7: When Selling Under Consignment, Review the Secured Transaction Provisions
If you are selling under consignment you may want to review the secured transaction provisions. Consignment falls under Revised Article 9. In order to have priority rights over a previous secured interest, the consignor must now comply with the same rules that apply to a Purchase Money Security Interest in inventory. Meaning, if you are selling under consignment, you must get a consignment agreement signed; file a financing statement; and search and notify all previously secured creditors. If you do not, you risk losing your inventory to previously secured creditors.
Tip #8: When should I file a Fixture Filing?
A fixture is defined as goods that have become so related to real property that an interest in them arises under real property law (Article 9-102). A few examples are gas/fuel pumps, ovens, and external signs. If your UCC Security Agreement calls out “fixtures,” you should consider filing a UCC Fixture. The Fixture filing will be filed at the county level against the real estate and will appear on a title search. This will alert potential buyers/sellers that the debt needs to be paid before the title of the property can be transferred.
Often, we take for granted when a UCC is instantly recorded online that all is well. BUT how do you know your filing will appear in a UCC-11 search? Each Secretary of State office has their own software to house UCC filings that sometimes can be unreliable or outdated. The only way to determine if your UCC filing is indexed correctly is to conduct a Reflective Search. If that Reflective Search does not display the filing, you have a problem.
Tip #10: UCC and Default
If your customer has defaulted on payment(s) and you have filed a Purchase-Money-Security-Interest UCC, you need to determine whether you would like your equipment/inventory (aka goods) back.
- If you do not want your goods back, you can place your claim with an attorney to file suit. By filing suit, you may receive Judgment, which allows you to garnish accounts and/or attach to assets.
- If you do want your goods back, and your customer has the goods, you have the right to repossess without disturbing the peace.
If you are unable to peacefully repossess the inventory/equipment, you could take legal action by filing a temporary restraining order or by filing suit against your debtor.