I recently (again) wrote about the importance of a solid preliminary notice policy in preserving the lien rights, and therefore the security, of companies in the construction industry. But, what about companies not in the construction industry or construction companies who wish to have additional security? That’s where a Uniform Commercial Code – 1 Financing Statement can come in handy.
UCC Financing Statement: What Is It, and How Does It Work?
Security interests in personal property (as opposed to real property) are governed by Article 9 of the Uniform Commercial Code (“UCC”), and are generally granted (and created) by a written security agreement, and perfected by filing. For businesses in industries where security is not built directly into the law, as it is in construction, security can be gained through a security agreement and the filing of a UCC-1 Financing statement. A security agreement may be attached to the credit application if UCC liens are going to be a routine part of your business’s credit policy. More likely, however, UCC security interests may come into play after a potential credit determination has been made in order to secure that specific extension of credit.
Security interests in personal property (as opposed to real property) are governed by Article 9 of the Uniform Commercial Code (“UCC”), and are generally granted (and created) by a written security agreement, and perfected by filing.
Security Agreements are contracts outlining the relationship between the creditor and the debtor in a secured transaction and governs the rights of each party with respect to the secured property. In order to have a valid security interest, the creditor must have a security agreement with the debtor that meets certain specific requirements, namely, it must be signed, it must clearly state that a security interest is intended, and it must contain a sufficient description of the collateral subject to the security interest.
A security agreement does not need to be an overly complicated legal document in order to be effective, it just must contain the 3 required factors. A letter or other basic document, such as one that could be provided as an exhibit to your company’s credit application may be sufficient provided the 3 requirements are met. It is likely a good idea to also include that the creditor is allowed to file a UCC financing statement because this clause can allow the creditor to file the financing statement to perfect the lien without getting an additional signature form the debtor.
The information that must be included in the security agreement must be specific to satisfy the requirements. The name of the debtor (and the owner of the property if those are different) must be exactly correct — an incorrect name can cause the security agreement to be ruled invalid, even if seems a simple mistake.
The description of the collateral must also be specific. Serial numbers, VINs, etc., are clearly sufficient for security agreements regarding that type of property. Other types of property require different levels of description, for example, a current inventory list will likely be sufficient for a security interest in inventory, and the same likely goes for fixtures. Finally, the security agreement must specifically state that a security interest in intended by this document by including in the agreement the statement that a “security interest” (specifically) is intended.
After a security agreement has been entered into, a security interest under the UCC is perfected by filing a “financing statement”. Generally, the financing statement is filed in the state of the debtor’s incorporation — not the state in which the property is located.
Financing Statements as Part of Credit Policy
Determining when a UCC security interest should be sought to secure credit extended is a business-by-business decision. Factors to consider may include the credit score of the business, the value of the business, the value of the credit sought, and the existence or non-existence of other forms of security. A sample UCC security interest policy may look something like this:
Security Agreements will be required for all extensions of credit meeting the following criteria:
- Business has a credit score of ___________ or lower, and/or
- Business has a value of _____________ or less,
- Extension of credit sought is ________________ or higher,
- No more than one of the following is available: personal guarantee, mechanics lien, joint-check agreement.