Steps to Take to Become a Secured Creditor

Credit professionals who become secured creditors go to the front of the payment window if one of their customers defaults. The process takes time and a little money, but the investment can be well worth it, to protect your company's interests. (See Go to the Head of the Line for details.)

You need to obtain and file Uniform Commercial Code (UCC) forms that are available on AR & O2C Network and from state government offices, usually the secretaries of state. 

Below are the steps you need to take to become a secured creditor:

• Prepare a security agreement with your customer.

• File a UCC-1 form or financing statement with the appropriate state office.

• Search for and notify other secured creditors that you have "perfected" or established priority.

Prepare Security Agreements. A security agreement defines a transaction's terms and creates a secured interest. It can be a standalone document, sales agreement, promissory note or credit application.

File Financing Statements

Financing statements are prepared on UCC-1 forms. A financing statement records your security agreement and makes it a public record. The documents stay in effect for five years and can be extended for an additional five years.

Search for and notify other secured creditors

Use UCC-11 forms to search for other secured creditors. When and how you notify other secured creditors depends on whether the goods used as collateral are defined as inventory or equipment and if the lien is a blanket lien or purchase money security interest filing (PMSI).

If the goods you placed with the debtor are going to be resold, the products are considered inventory under UCC guidelines and state laws, and you must notify other secured creditors before the goods are delivered.

If the goods are products, like machinery, used in the course of your customer's business, you must contact other secured creditors within 20 days from the time the customer receives the goods. Blanket liens "cover" all of a debtor's assets and payment priorities are established by filing dates. The first debtor to file is first in line.

With a PMSI lien, trade creditors can perfect or establish priority over other secured creditors on the goods or products they supplied, if they notify them before inventory is delivered or within 20 days from the time equipment arrives.

Related material

Uniform Commercial Code

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