Service Area: Collection Services

Supply House? You Can Use the UCC to Get Paid

Posted on July 21, 2015 by - In Other Commercial Credit News

Supply House? You Can Use the UCC to Get Paid

By John Allen Waldrop III, Commercial Lawyer

Supply houses often overlook a powerful tool at their disposal when trying to get paid.  They are often so focused on preserving lien and bond rights that they forget about the power of the Uniform Commercial Code (UCC).  The UCC can be a faster and more effective collection tool, when used correctly.

Collection and Repossession

Direct collection and repossession are two quick and powerful remedies that can be found under Sections 9-607 and 9-609, respectively.  Section 9-607 permits the creditor to collect money directly from third parties that owe money to the debtor.

In construction lending, this means that a Supply house can appeal directly to the owner or general contractor for ANY money owed to a subcontractor when that subcontractor is in default with the Supply house.

Repossession under 9-609 allows the creditor to recover the collateral when the debtor is in default as long as they do not breach the peace.  Thus, the Supply house can pick up material from the job site in whole or partial satisfaction of the debt.

Repossession can occur before filing suit with or without the debtor’s consent or when the debtor is in default. Timing can be critical if a debtor is insolvent.

Purchase Money Security Interest

Another benefit of using the UCC to get paid is that a Supply house can create a “Purchase Money Security Interest” (PMSI.) Under applicable law, a PMSI is a super-priority secured position.  This means that the Supply house’s interest will trump the bank’s senior lien holder position even though the bank may have filed its mortgage before the filing of the UCC by the Supply house. In a bankruptcy or insolvency situation, this can be a powerful tool to maximizing the recovery.

How to Create and Perfect the Security Interest

The process to create and perfect the security interest is easy.

First, the Supply house can include security interest language in its standard credit application. Then, upon signing of the credit application, it can then file a form, known as a UCC-1, in the appropriate jurisdiction.

The forms must be filed properly, but there is an easy and cost effective solution to minimize the risk of errors by using a reliable provider.

NCS is a leading provider of secured financing services in North America. They can make sure that the forms are filed accurately, timely and in the right location, which are critical components. They will even remind you when it is time for renewal. After using their services for over ten years, I have found them to be “easy to do business with” and reasonable in their pricing.

UCCs Are a Powerful Tool

A sale is not a sale until the money is in the bank.

Construction lending at all levels within the supply chain requires the use of best practices to be successful. The UCC can be a powerful tool, when used correctly, to manage risk.

For credit professionals managing a portfolio of contractors and subs in the construction industry, a relatively small investment in a UCC program can yield a huge return.

About the Author

John Allen Waldrop III is a commercial lawyer with over 20 years of experience.  He served for over 15 years as in-house counsel for a leading national wholesaler of materials in the construction industry where he provided counsel to the credit department.  The contents of this article are for general information purposes. It is not intended as “legal advice” and does not create an attorney client relationship with any of the readers. Mr. Waldrop received no compensation or other consideration for providing this article. For follow up questions, Mr. Waldrop can be reached at johnallenwaldrop@gmail.com.

Hip Hop and Credit Management

Posted on June 22, 2015 by - Credit Risk Management

Hip Hop & Credit Management: Advice to Credit Professionals in 30 Seconds

Several years ago, I was given the opportunity to view a documentary, hosted by its creator, The Hip Hop Project. The documentary centers on a formerly homeless teenager who wants to inspire and empower youth. There were many poignant and salient moments, but one question resonated throughout the film “If you had the whole world listening, what would you have to say?”

“That’s great Kristin – touching story, really – but what on earth does this have to do with credit management?!” I’m so glad you asked!

A friend of mine recently took a position in the credit department at a large manufacturer and she asked me:

“See, my boss wants me to come up with a plan on how they can improve the margins without taking too much risk. But they already have a process and I’m not really sure that there is anything else I can bring to the table. Got any advice?”

I sat across from her, silently – any time I’m problem solving, I tend to ask myself “If I had 30 seconds to convey my thoughts to a silent & listening world, what would I say?” (I have to impose a time limit on myself, otherwise I’d never snap back to reality.) She interrupted my 30 seconds to tell me that most of their customers have been customers forever, though if they have a new customer they pull a credit report, sometimes they ask for a letter of credit, sometimes they require payment up front and other times they simply invoice and hope the invoice is paid within the allotted 45 days.

My friend interrupted my 30 seconds, but between her question and the documentary question, I decided to ask a few of my NCS colleagues

“If you had 30 seconds to give a credit professional advice on reducing risk, what would you say?”

Here’s what they had to say – I hope you can take a few minutes to “listen.”

Know Your Customer

“Know your customer! Knowing their history before contracting with your customer, means you have the opportunity to mitigate loss. You have the opportunity to save valuable time and money; be proactive not reactive. Take advantage of project and party monitoring services. With services like LienFinder, Corporate Monitoring and credit reporting, you can set email alerts to advise you of any project or party activity. Wouldn’t you want to know of changes as soon as possible? I would think so!” – Mary Cowan, NCS President

Be Proactive

“If you would like to reduce your risk, secure your receivables. Being proactive in this regard can help to prevent major losses.  Serve preliminary notices on all projects over a certain dollar limit so that if there are payment problems by anyone within the contractual chain, or if anyone files bankruptcy, you will have the right to make a claim against a payment bond or to file a mechanic’s lien.  Preliminary notices, liens and bond claims provide great leverage when seeking payment.  Follow the statutory requirements, and carefully track your deadlines to ensure that your rights are maintained.  And, if payment is not forthcoming, take action (filing a lien or a bond claim) sooner rather than later.  Often, collectability is dependent on the funds being held by the owner, or someone else within the contractual chain, so the best practice is to secure your rights as soon as possible.” – Nancy Kennerly, Executive Director

Secure More, Sell More

“Reducing risk needs to be balanced with the impact to sales and cost. Secured transactions are an economical way to extend trade credit while at the same time improving your standing to that of a secured creditor. The benefits are numerous with the greatest benefit being an improvement to cash flow. They also will provide you the ability to say “yes” to a marginal account that perhaps would not have received credit or as much credit in the past. The sales team should welcome this new tool to help them sell more” – Jerry Bailey, Executive Education & Sales Manager

Security Creates Leverage

“USE PROTECTION! Seriously, it is important that creditors are proactive in protecting themselves.  How do they protect themselves? Ask the right questions— know your debtor, who they are, their credit history and financial stability and what it means to YOU.  Check this information frequently!  Things change fast. Get yourself secured & create leverage.  Take the time to know what you need to do—or partner with a credit professional who does.  Missing a notice or incorrectly identifying a contractual chain member can make the difference between secured and unsecured.  Know if UCC’s, liens/bonds, personal guarantees, promissory notes, joint check agreements are available and applicable—the more leverage, the better!  The more entities on the hook to pay you, the better! Documents!  Signed contracts and/or purchase orders are a must!  Don’t get sloppy or lazy or blame it on your “Sales Reps”.  Take the time to get the proper paperwork in order NOW.  You never know when you will need it.  And then, it will be too late!  And you will lose.” – Amy Poje-Marsh, Director of Operations

Are you noticing a trend? Be proactive, know your customer, secure your receivables.

So, if you had 30 seconds to give a credit professional advice on reducing risk, what would you say?

Oh, one other thing… I couldn’t help but recognize a similarity with The Hip Hop Project’s philosophy “…we empower them [youth] with the knowledge, tools and opportunity…” and the NCS philosophy “…empowers credit professionals by providing exceptional education, resources and innovative services…”

9 Documents Every Collector Should Have

Posted on June 16, 2015 by - Credit Risk Management

The Top 9 Documents Every Collector Should Have

I once had a history teacher who constantly preached “The pencil remembers what the mind forgets…” It was his delicate way of reminding us to quit blankly staring at him and grab a pencil and paper for note taking. Although few of us use pencils and notebooks in the digital age, the phrase still rings true because it stresses the importance of having everything in writing.

For the purposes of today’s topic, let’s treat “writing” as “documentation.” If you find yourself faced with the task of sending an account to collections, it’s important to provide the collector with all pertinent backup documentation. Collecting a past due receivable can be difficult, but if your collector has the necessary documentation, debt recovery becomes easier.

Why Should I Have Documents?

Yes, it’s worth repeating: “Collecting a past due receivable can be difficult, but if your collector has the necessary documentation, debt recovery becomes easier.” Providing the documentation at the time the collection is placed facilitates communication with your debtor regarding the past due receivable and it also improves efficiency.

Efficiency? Why Would I Care about Efficiency?

Efficiency matters on many levels! For the sake of simplicity – if something is more efficient, it tends to be faster. If your collection agency has the necessary information, they are able to better prepare and preparation means communication with your debtor will be more effective, leading to a faster recovery.

For example, when I’m going to cook, I make sure I have my recipe, the ingredients and the necessary utensils in order before I start cooking. I don’t want to run back and forth between the refrigerator, cabinets & stove because I end up wasting time and inevitably making a mistake (or in my case, burn the food to the point that even the dog won’t come near it).

Come to the proverbial kitchen with everything in hand – make the most of your time & money.

What Documentation Should I Include with a Collection Placement?

Here are some documents our collectors find to be beneficial:

  1. A copy of the Contract or Agreement
  2. A copy of the Credit Application
  3. Copies of Invoices and Statement of Account
  4. Copies of the Proof of Delivery
  5. A copy of the Personal Guarantee
  6. Your customer’s Trade References, including bank name and account number, and copies of any Returned/NSF Check(s)
  7. Copies of Correspondence & Notes. In this bundle, make sure you have emails, letters (demand letters, payment requests and notices), and documented phone conversations (i.e. “Spoke with Mr. Smith 5/5 @ 2:00 pm and he advised payment will be made 5/31″).
  8. Corporate Certificate: this should include your debtor’s legal identity, including whether it is a corporation, partnership or proprietorship
  9. Copies of a Credit Report(s)

Also make sure you provide your collector with contact information for your debtor. This should include the debtor’s full name and physical address as well as the names, addresses and phone numbers for the company owners.

Need to free up your time? NCS can handle your collections – contact us today!

Debtor’s Business and Your UCC Filing

Posted on June 2, 2015 by - UCC Financing Statements

Your Customer is Selling Their Business, What’s in Store for 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.

The Carmack Amendment

Posted on May 26, 2015 by - Credit Risk Management

The Carmack Amendment: What Is It? Why Does It Matter?

Today’s contribution is authored by Ms. Michelle Gerred, Esq., NCS Notice & Mechanic’s Lien and Collection Services

Do you ship goods to your debtor? Are you a material supplier shipping materials to a jobsite? If you answered “yes” to either of these questions, then you may want to take a moment to learn more about the Carmack Amendment.

A Little History

The Carmack Amendment (not to be confused with Carmex, the lip balm) was enacted in 1906 after congress enacted the Interstate Commerce Act in 1887. Essentially the Interstate Commerce Act was an attempt to regulate interstate transportation and its subsequent amendment, Carmack, was the adoption of uniform guidelines used to determine who is liable for goods that are damaged during transit.

Why It Matters

The Carmack Amendment only covers actual damage to the shipped goods and does not provide protection against “consequential damages” or “liquidated damages” caused by the carrier.

What are consequential damages? They are damages that are the consequence of the issue, such as delay.

If the carrier damages your goods, which requires new goods to be manufactured or shipped, and the goods don’t make it to their destination on time, the carrier won’t be at fault – even though the carrier essentially triggered a domino effect when it damaged the shipment. Therefore if you are back-charged for the delay or liquidated damages, you will not be able to recover against carrier for those consequential damages, under the Carmack Amendment.

All Is Not Lost

However, some recent cases have offered hope! In Am. Natl Fire Ins. Co. v. Yellow Freight Sys., 325 F.3d 924, 931 (7th Cir. 2003) the court determined some damages, including damages for delay, lost profits, and all reasonably foreseeable consequential damages, could be sought against the carrier. The catch? Only if those damages were foreseeable.

In order to proceed against the carrier for consequential damages, you must show that the carrier had actual notice of the special circumstances that could put them on the hook for those types of damages. (see Contempo Metal Furniture Co of California v East Texas Motor Freight Lines, 661 F.2d at 765) This means you need to include a delay damage clause in your contract with the trucking company.

What If I Use a Transportation Broker, Can I Recover from Them?

Unfortunately, no. Brokers enjoy the same protection under the amendment. In fact, under the amendment, instead of going against the broker, your only recourse is to go against the transporter for the actual damage done to the product.

But Wait, There’s More

Be careful and ask about rates and limiting liability when contracting. A carrier can limit its liability for any damages by using an established rate or tariff.   When looking at limiting the carrier’s liability the courts look to see if the carrier:

  • obtained the shipper’s agreement for his choice of liability,
  • gave the shipper a reasonable opportunity to choose between two or more levels of liability, and
  • issued a receipt or bill of lading prior to moving the shipment.

Therefore, you must look at your documentation closely when using a carrier; the fact is the carrier could have a clause within the documents alerting you to an established rate limiting the carrier’s liability to a set dollar amount.

Remember the document does not necessarily have to say what the limitation is, like an insurance policy does, it just has to say there is a limitation.  It is up to the shipper to ask for specifics or to negotiate for a higher rate, especially when the possibility of consequential damages comes into play.  Needless to say, liability limited in this way is the most highly litigated issue under the amendment.

As always, when in doubt, seek a legal opinion!

RUG: Secured Transactions in Mexico

Posted on May 13, 2015 by - UCC Financing Statements

Secure Your Receivables in Mexico via the RUG

Historically, Mexican companies have had difficulty securing financing from foreign banks, primarily due to concerns about the reliability of the laws governing secured transactions.

The Mexican government recognized the need to alleviate those apprehensions and set forth goals to create a mechanism that allows public disclosure of security interest and to establish priority rules for debtors.

In September of 2010, Mexico instituted amendments to their secured transaction law. These amendments better aligned Mexico’s secured transactions with U.S. Uniform Commercial Code – Revised Article 9 and Canada’s Personal Property Security Act.

A properly perfected pledge (in the U.S. & Canada this would be the security agreement), protects the creditor against third parties that claim an interest in the collateral, allows the creditor to foreclose on the property and apply all proceeds to the outstanding debt, and grants preference against a bankruptcy trustee and all other creditor types including tax claims.

The filing system in Mexico is called the RUG (Registro Unico Garantias Mobiliarias – Unified Registry of Moveable Property Collateral) and RUG filings are in place for 12 years.

There Are Three Ways to Pledge Collateral Under the RUG

  • Ninguno: all products that are to be sold by the debtor (similar to the PMSI in Inventory filing under UCC/PPSA)
  • Todos los bienes de la empresa: all assets currently owned (similar to Blanket or Basic filing under UCC/PPSA)
  • Bienes específicos: any specific asset that can be identified (similar to a PMSI in Equipment filing under UCC/PPSA)

Compliance with the RUG

  • The debtor must sign three documents (must be written in Spanish):
    • A non-possessory pledge, which is similar to a security agreement under the UCC & PPSA
    • A credit application, which is specific to the RUG filing process with Mexican law governing
    • A promissory note, which elevates the security interest to an executive proceeding if there is a default, and provides stronger remedies for the creditor
  • The secured party will need to authenticate the identities of the debtor by ensuring a Mexican notary public is present at the time the documents are signed.
  • The secured party must verify the debtor’s correct legal name, by requesting the debtor provide a copy of the articles of incorporation, as well as provide their The Federal Tax Registration and electronic registry number.
  • The completed pledge agreement, signed by both parties and notarized should then be recorded in the public registry by a Federal Notary.

NCS Is Here to Help

If you would like to begin securing transactions in Mexico, please don’t hesitate to contact us! NCS can provide all necessary documents and assist with the execution of a RUG filing.

The Importance of Filing Your PMSI Timely

Posted on April 27, 2015 by - UCC Financing Statements

The Importance of Filing Your PMSI Timely: When is a Purchase Money Security Interest (PMSI) Perfected?

A PMSI is considered fully perfected once you:

  • have the debtor sign and date the security agreement/credit application
  • verify the debtor’s correct legal name and state of jurisdiction through the articles of incorporation or driver’s license
  • file the Financing Statement
  • complete a UCC-11 search in the state of jurisdiction and all states to which the secured party is shipping
  • notify all previous secured parties

The typical perfection process time can take 3 to 4 weeks.

Why Would a PMSI Perfection Be Delayed?

There are many factors that can cause the delay of a security interest’s perfection. Factors such as:

  • if the state of jurisdiction does not offer online filing (i.e. the jurisdiction only accepts entries via fax or mail)
  • if the filing includes an attachment, such as an additional collateral description, and the state does not permit the online filing of attachments
  • if the UCC search website is not through the security interest filing date (i.e. today is 04/01/2015, but the state has only filed records through 02/01/2015)
  • if several previous secured parties need to be notified and there is a delay in verifying receipt of the notification letters or if those parties are located in a different country

The Date of Perfection

Once a PMSI is fully perfected, your collateral will be secured as of the date of the filing or the date the agreement was signed, whichever is later.

Example of Perfection

Any inventory that the debtor takes possession of before the date of perfection may not be protected by the filing. This is because you are not considered a secured creditor until perfection which is achieved by completing the steps listed above.

For example, you and your customer signed a security agreement. Some time passes; now your customer has an outstanding balance of $100,000.00 and you decide to file a PMSI. Because you filed a PMSI and followed all the steps for perfection, you believe you are now a secured creditor, so you extend an additional $50,000.00 to your customer. Unfortunately, you are only considered secured for the $50,000.00 your customer acquired after the PMSI was perfected, leaving the $100,000.00 unsecured.

Had you, the creditor, filed the PMSI when the original $100,000.00 agreement was signed, the full amount ($150,000.00) would be considered secured by the Purchase Money Security Interest filing.

Don’t Get Hit By Preference

Another important reason to file a PMSI as soon as you receive the signed security agreement/credit application is to proactively protect yourself, in the event your customer files for bankruptcy protection.

Let’s say you discover your customer is intending to file bankruptcy in the next month and you are not a secured party. Unfortunately, it’s too late to file the PMSI as security because there is a 90 day preference period regarding all security interest filings and bankruptcy. Any security interest filed within 90 days of the bankruptcy being filed will be dismissed as a preference and not considered as part of the bankruptcy proceedings, leaving you as an unsecured party.

Best Practice

Always file your PMSI at the time the security agreement is executed! Remember the UCC has no impact on your customer’s credit or day to day operations. Only impact is if they file bankruptcy then you are a secured party.

Demand Letters and UCC Filings

Posted on April 15, 2015 by - Credit Risk Management, UCC Financing Statements

What You Should Know about Demand Letters & UCC Filings

The demand letter is often overlooked as a collection tool for UCC filers, but it can be a cost effective alternative to the processes of repossession or litigation. As we’ve mentioned before, demand letters are not kind, gentle, love notes. Demand letters are typically harshly worded, authoritative notifications – after all, the definition of demand is “…an insistent and peremptory request, made as if by right.” which loosely translates to mean “It’s mine! You have it, pay me or give it back.”

What Should I Include in a Demand Letter?

Always remember to be factual & succinct. When you have filed a UCC, you should use that filing as leverage within your demand letter. Make sure to include the following information in the demand:

  • Date of the demand
  • Your company’s name and contact information
  • Your debtor’s name and contact information
  • The date the Security Agreement was executed
  • The UCC filing number and the date of the filing
  • Reference to the Collateral Description
  • Reference to the Default Terms
  • The amount of the debt
  • The due date of the debt
  • How the debt should be paid
  • The consequence of not paying the debt

You are probably wondering “How on earth can I be succinct when I have to include ALL of this information?!” And the answer is to remember to stick to the facts, no additional commentary or emotion need be in the demand, just the facts.

Who Should Receive a Copy of the Demand Letter?

The demand should be served upon your debtor and it is recommended you include a copy of the Security Agreement and a copy of the UCC filing.

There’s a Consequence for Every Action

Always include a description of the consequences for not paying the debt.  It’s important to include realistic ramification: “…If payment is not received, we may pursue all available legal remedies available under the Ohio Uniform Commercial Code.”

Can I Send a Demand Letter even if I Didn’t File a UCC?

Yes, absolutely YES! There are no prerequisites for sending a demand letter, other than the outstanding debt.

When Should I Send a Demand Letter?

You may find a demand letter to be most beneficial before attempting to repossess your goods or before proceeding with enforcement of the UCC filing under the Uniform Commercial Code.

 Looking for an example of a general demand letter? Download one for free