The Benefits of Secured Transactions and Article 9 of the Uniform Commercial Code
The subjectivity in evaluating credit worthiness magnifies the need for credit tools. Article 9 of the Uniform Commercial Code provides an opportunity for trade creditors to collateralize or “secure” their goods and/or accounts receivable utilizing the personal property assets of their customer.
Sounds Like a Big Deal!
Not really. From your customer’s perspective, a UCC filing is practically irrelevant, unless there is a bankruptcy. In addition, the filing never costs the debtor a dime… ever. A Security Interest or UCC filing simply elevates the status of your receivable and/or inventory/equipment to that of a secured creditor.
How Does It Work?
In a bankruptcy, all creditors are split into two classes: secured and unsecured.
- In a Chapter 7, secured creditors are paid first in the order the UCCs were filed; unsecured creditors split what is left over on a pro-rated basis.
A UCC filing ensures you are a secured creditor and therefore in the best possible position to get paid. In addition, a Purchase Money Security Interest filing provides the priority right of repossession of your inventory or equipment at default or bankruptcy. You define default in your security agreement.
- In a Chapter 11, all secured creditors have the same status providing substantial leverage over the unsecured creditors as it relates to leveraging liquidation.
The UCC process is a cost-effective solution for securing your inventory, equipment and/or receivables, especially important in today’s fragile economy.
Your customer’s only involvement in the process is signing a security agreement. This agreement or contract may be a stand-alone document or can be added to a standard credit application or other document. When your customer signs a security agreement, the UCC-1 perfects or records the security interest. A security interest collateralizes your company through equipment, inventory, the proceeds from the sale of your inventory, and your accounts receivable. Once the filing is completed, it protects all transactions for five years. Protect your bottom line as a secured creditor.
Types of UCC Filings
In an earlier post we discussed the differences between Blanket Filings and PMSI Filings; however, there are additional UCC filings.
- Consignment sales: Goods sent to an agent for sale with title being held by consignor until a sale is made.
- Bailment: Goods, which will be processed or improved in some manner, delivered in trust for a limited period.
- Tooling: Tools provided to an outside manufacturing company in order for that company to provide a finished product for sale.
- Warehousing Situations: Stocked goods or inventory held at a third party location.
- Installments/Promissory Notes: Payment for a debt made in intervals.
How Do You Begin?
Determine when and where security is applicable in your business. For example, your company may deem filings are necessary for all customers with credit lines higher than $10,000.
Once you have set an account threshold, begin implementing the UCC filings by having your customer sign a security agreement. The best time to have your customer sign the agreement is at the time of contract and it’s a best practice to include the security agreement within the terms of your loan or credit application.
