Did you know you can take a security interest in goods sold on terms? This option is available as long as the customer agrees, and the goods are not owned by or pledged to another. Security interests offer an advantage if the buyer defaults, and provide you alternative debt collection remedies. By obtaining a security interest in specific collateral owned by the borrower, the creditor becomes a secured lender.
Consider how a bank or alternative lender works: if the loan is collateralized, the loan is based on the collateral of a borrower. The borrower, in return for the loan, pledges the assets or other capital to secure the loan giving the lender a security interest in the collateral. By taking a security interest, you are technically taking a position as a secured lender. Your customer is a borrower with an encumbered asset. A secured lender also has additional remedies in the event of non-payment by the borrower.
Becoming a Secured Lender
Becoming a secured lender is quite easy but you need the customer’s consent. Identify goods, fixtures, and receivables owned by the customer that are not pledged to anyone else. If you sell goods to the customer, you can secure your interest in those goods and, if appropriate, more goods or inventory owned by the customer.
The customer then signs a UCC (unified commercial code) financing statement, granting you a security interest in the collateral. The signed UCCs must be filed with the appropriate offices in the debtor’s state in order to be considered properly filed. They will also need to be renewed periodically.
By properly filing the UCC statement you will effectively put other creditors and lenders on notice that you have a security interest in the assets. The retained interest can help put you in a better position should payment not be made as agreed.
It’s important to note that if the goods are pledged to another and then pledged to you, your interest in the assets will not exist or will be secondary to the primary lender. If the customer pledged their assets to a bank in consideration for a loan and the borrower defaults on the loan, the lender could foreclose or seize the assets. Only once the lender’s financial interest is satisfied can you recover what’s owed to you.
If you have questions regarding a debt collection matter, contact Frank, Frank, Goldstein and Nager for a consultation.
