Collection Prevention: UCC Filings
The subjectivity in evaluating creditworthiness 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. In the event of your customer’s bankruptcy or default, a properly perfected UCC filing elevates your status to that of a secured creditor, putting you in the best possible position to get paid.
In 1952, the Uniform Commercial Code (UCC) was created in an effort to promote commerce between states. Prior to the creation of the UCC, selling between states was similar to how we sell between countries today – there was a great deal of risk involved and little financial security available. Once the UCC was in place, it afforded creditors additional security, therefore enabling the extension of more credit, aka more sales.
Why Should I File UCCs?
When implementing a UCC filing program, it’s important to understand the widespread benefits: minimize financial risk, reduce DSO, improve cash flow and increase sales. Wait, “increase sales” – I know you are wondering if you read that correctly – yes, increase sales. 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.
One Part Financing Statement + One Part Security Agreement
When your customer signs a security agreement, the UCC 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; protecting your bottom line as a secured creditor.
Types of UCC Filings
There are primarily two types of secured transactions under Article 9 of the Uniform Commercial Code: Blanket Filing and Purchase Money Security Interest (PMSI) Filing.
A Blanket filing is a security interest in all assets of your customer on a non-priority basis, eliminating potential conflict with your customer’s primary lender. The priority or payout in a bankruptcy is determined by the filing date (first in time, first in right). The UCC filing elevates the status of your accounts receivable to that of a secured creditor.
Blanket filings are applicable when providing financing, selling services, or in situations when your customer “consumes” or otherwise does not stock your goods.
A PMSI filing provides the same benefits as the blanket filing with the addition of the priority of repossession of specific identifiable goods, primarily inventory or equipment that your company would provide.
- Purchase Money Security Interest in Equipment Securing collateral that is defined as equipment 9-102(33) – “Equipment" means goods other than inventory, farm products, or consumer goods. The “equipment" is used in the course of the debtor’s business – it is not stocked.
- Purchase Money Security Interest in Inventory Securing collateral that is defined as inventory 9-102(48) – “Inventory" means goods, other than farm products, which: (A) are leased by a person as lessor; (B) are held by a person for sale or lease or to be furnished under a contract of service; (C) are furnished by a person under a contract of service; or (D) consist of raw materials, work in process, or materials used or consumed in a business.
Other Types of UCCs
- 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.
My Customers Won’t Go for This
Why not? 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.)
- There is no cost to your customer. The core of a properly perfected UCC filing is the security agreement. Your customer doesn’t have to pay to sign a security agreement – it’s like signing any credit agreement. The costs associated with the UCC filing will be paid for by your company (and those costs are minimal).
- There is no impact to your customer’s credit rating. UCC filings do not impair your debtor’s credit rating. The filings will appear on the credit report, but simply to provide confirmation that another creditor has a secured position or that you pledged collateral for trade credit.
- Your company is not the only company securing its accounts receivable through the UCC process. Financial institutions and your competitors are filing UCCs as well.
Trust me – your company is not the only company mitigating risk through UCC filings. Hundreds of thousands of companies throughout the country (even in Canada, Mexico, Australia and New Zealand) are securing receivables through the UCC process. Did you know that mortgages, car loans and secured lines of credit often have security language written right into the document? And, when you sign that document, the security language allows those companies to file a UCC. UCCs are a simple part of everyday business.
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.
Authored by Kristin Alford, Education & Marketing Specialist for NCS. Learn more about NCS.