Banks are the primary user of UCC Filings, and the financial institutions incorporate many of the credit principles such as the 5 Cs of credit—capacity, capital, character, conditions and collateral–used by trade creditors. However, when banks lend on commercial loans, collateral is often the most important, said Chris Ring, of NACM Secured Transaction Services (STS).
"Trade creditors know that collateral is important, but they often skip past it for three primary reasons," Ring said. First, they are uninformed about how to collateralize a transaction; second, they deem the collateralization process as cumbersome; and third, they are not incentivized because they have never experienced a large write-off in a bankruptcy.
In this week's NACM STS webinar, UCC Filings: If You're Acting Like a Banker, Think Like a Banker, Ring focused on addressing the first two reasons and explained how creditors can use them as a tool to establish a security interest with customers. "UCC filings are a good way to collateralize your receivables," Ring said.
There are two primary types of UCC Filings, blanket and purchase money security interest (PMSI). "All trade creditors can take advantage of a blanket filing and PMSI filings are used by trade creditors who are selling inventory or equipment," Ring said.
Regardless of which type of filing a creditor wants to use, UCC Filings are consensual and require both the creditor and debtor to sign a security agreement. Once the security agreement is signed, a UCC-1 financing statement must be recorded to create a secured transaction. Ring mentioned that STS has templates for security agreements that can be forwarded to trade creditors for review by management and counsel, and STS can help ensure that a UCC-1 financing statement is filed correctly.
Although it is called the uniform commercial code, Ring cautioned that each state ratifies the code in to law, and each state handles the UCC filing process differently. "It is important to become familiar with the UCC laws in the states in which you do business," he said.
Ring also stressed the importance of verifying the corporate legal name of an entity that operates under a corporate veil such as an S-Corp or LLC. "Part of the 2013 amendment to the code requires that the corporate legal name match the name on the organic record [e.g. formation documents]," he said. "It is important to conduct a corporate certificate search to find the formation document."
Lastly, Ring let participants know that he is available to consult with members and help them best use UCC filings for their companies. Subscribers to the Lien Navigator can watch the webinar in its entirety via the STS Construction Credit Academy to get more information.
-Bryan Mason, editorial associate