This blog post focuses on how you might be qualified to use security instruments to protect your company’s debts and receivables. As you will see, if a security instrument is available you, it will increase the chance that you’ll get paid.

What Is A Security Instrument And How Can It Help?

Wikipedia’s entry for “security interest” provides as follows:

A security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation…It gives the beneficiary of the security interest certain preferential rights in the disposition of a secured assets. Such rights vary according to the type of security interest, but in most cases, a holder of the security interest is entitled to seize, and usually sell, the property to discharge the debt that the security interest secures.

You might want to read that quote twice to really comprehend how these things work. Too many people think security interests are “out of their league,” while in reality, they are very, very simple. It can be summarized like this:  (1) you perform work or provide some service or material; (2) you get a right in the thing you improve in some way; (3) if unpaid for your service, you can take the thing.

Wouldn’t that be nice? How this could help your collections problems or procedures should be pretty obvious.

Whenever someone is behind on paying, they are usually prioritizing your debt. Having a security interest really goes to the root of this problem, and fixes it in one of two ways.  First, if they have the money and you threaten to seize some asset they own, the inconvenience and expense of having the asset seized will prioritize your claim and motivate them to pay it.  Second, if that doesn’t work, you’ll actually seize the debt and then get paid by selling it.

Types of Security Instruments

Security interests aren’t available for everyone and everything. The first step to using security to improve your collections program is to figure out which one may apply to you. Here are some of the most popular security instruments.

Construction Industry Mechanics Liens or Bond Claims

In the construction world, security interests are very available. On almost every construction project in the United States, those who furnish labor, materials or services to the project will have a security interest in the land that they are improving.  If on a privately owned project, the security will be in the property itself.  If on a state or federal project, the security will be in a mandatory payment bond issued for the project.

How to qualify and use this security right?  The first step is to send any preliminary notices required, which depends on each particular project. The next step is to file your mechanics lien or bond claim as per statutory requirements.  That’s it.

Liens Against Moveables

The construction industry has the mechanics lien, which can be filed against construction projects on “immovables,” or in common parlance, real estate.  But what about work, services or materials that are furnished to moveable property such as airplanes, automobiles, motorcycles, motor homes, furniture, cattle, or even jewelry?

In many cases, liens can be filed against these items as well. Each state is unique in which movable property is protected and which isn’t, so you must consult with your particular state’s regulations to determine if you can file a lien on the movable property you served.

Qualifying, however, is usually pretty consistent. There is usually one type of qualification available when you are still in possession of the property, and another when you are not. In some cases, you may be required to be in possession of the property to lien it.

Just like with a mechanics lien, you must file the lien against the moveable in some recording office, and then, if it remains unpaid, foreclose upon it.

UCC Liens

The Uniform Commercial Code is available in every state, and it provides creditors with security in a number of different credit transactions. If the credit account goes unpaid, you can rely on your security in the identified property (equipment, inventory, etc.).

Almost anyone who extends credit is entitled to a UCC interest…but, they must file the requisite documentation.  These UCC filings aren’t complicated, but the paperwork is paperwork, which can be both overwhelming and intimidating. Getting deep into understanding the UCC, however, could pay dividends to your business.