Debtor’s Business and Your UCC Filing

Your Customer is Selling Their Business, What’s in Store for You & Your UCC Filing?

Businesses are bought and sold every day, sometimes without any consequence to creditors/vendors. Unfortunately, that is only sometimes. One of the primary reasons businesses are sold is due to fiscal distress, and the sale of the business is “simply” a way to escape the debts owed. (I use the term “simply” loosely – selling a business, especially a business with multiple vendors etc., is difficult – think of selling a home… times 100.)

How Can They Escape?

An unfortunate and common consequence of these transactions is that the buyer may require language within the sale that relieves them of any responsibility for the previous business owner’s debts. Erasing the debt linked to the business becomes a condition of the sale.

If They Can Escape the Debt, How Can a UCC Possibly Help?

Your UCC filing acts as a lien on the business, therefore, before title passes from one party to another, the lien should be acknowledged & either settled or renegotiated. Check out this success story:

A UCC Success Story

USF has a long time customer with several restaurants. The customer is a high volume account with annual sales exceeding $2M. The credit worthiness of the customer remains unknown as the division does not have financials, only their payment history.

The Credit Team pursued UCC’s on all locations to help mitigate risk last year. We were notified that the customer was selling a location which at the time had an AR in the mid six figures, all of which was past due. After their attorney did their due diligence they noticed a lien on the business which prompted a call from the seller inquiring about the UCC. Around the same time the attorney reached out and asked what was needed to lift the lien. The answer was simple, a lump sum check for the entire balance of $154,000. The sale took place and our Credit Manager was contacted by the attorney who had the check in hand for the full amount. Had we not had the UCC filing in place we would not have received this payment and very likely, only cents on the dollar.

The end result was a very good month for the division from a performance perspective based on this recovery. This success paid for the cost of filing previous UCC’s and future UCC filings for years to come. This was definitely a win when looking at the cost benefit/ROI for securing our receivables with the UCC process and utilizing the services of NCS.  – Division Credit Manager, US FOODS BALTIMORE

Use Your Spidey-Sense

OK, so you may not have a “spidey-sense” (perhaps you do – who am I?) but there are services available to monitor various aspects of your customer’s business, which could provide you with alerts to potential danger.

  • UCC Filings: file UCCs on your customers. We have previously discussed that these are harmless documents for your customer, but invaluable to you as a creditor.
  • Corporate Monitoring: enlist a service to monitor the incorporation activity of your customer. In the event your customer’s incorporation expires or is terminated, you will be notified & can take appropriate action immediately. (NCS offers corporate monitoring, take a minute to read this client perspective.)
  • Credit Reporting: this should come as no surprise – it’s incredibly important to know whether or not your customer is overextended. High debt to income ratios should be treated cautiously, as well as vague credit histories.

When in Doubt – Shout it Out!

No, you don’t have to actually shout, but if you have any concerns about your customer & their working capital or abilities to pay their debt with you, ACT. Make inquiries on the account and monitor the payment trends, reduce credit limits, require monies up front – whatever it takes to reduce your risk.

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