Using UCC Security Interest Filings to Increase Your Bottom Line

Companies can use UCC security interests to increase collections against delinquent resellers.

Many companies that distribute their products through reseller networks do not adequately pro-tect themselves against the possibility of a reseller going bankrupt or defaulting on their payment obligations. This problem is particularly acute when companies distribute their products to re-sellers on credit. Fortunately, there is a relatively simple solution that helps companies dramati-cally increase collections against delinquent resellers: UCC security interests.

Under the Uniform Commercial Code (UCC), a company may obtain a security interest from its resellers, making the products sold to the reseller, along with the reseller’s receivables associated with sale of those products, collateral for payments of monies owed to the company. This securi-ty interest can give the company a legal right to take possession of the collateral in the event that the reseller doesn’t pay its debts. Security interests are powerful tools that can significantly im-prove a company’s collections from its resellers, shorten a company’s average accounts-receivable period, and increase revenues. In addition, a security interest may give a company substantial leverage in negotiating with banks and other creditors of a reseller. And perhaps most importantly, if a reseller goes bankrupt, security interest holders generally receive priority repayment on their debts, before any unsecured creditors are paid.

Generally, a security interest may be granted by including a fairly short security interest provision in the reseller contract. Once a security agreement has been signed between the company and its reseller, the company generally can then “perfect” its security interest over the collateral by filing a financing statement with the appropriate Secretary of State’s office. Some key benefits of perfecting a security interest are that it gives other creditors notice of the company’s claim on the collateral, and in some situations may give the holder of a perfected first priority lien over all other creditors should a reseller go bankrupt or refinance its debts.

UCC security interest filings are cost-effective and can be processed in bulk for companies that have large reseller or other type of debtor networks. At Donahue Fitzgerald LLP, we have extensive experience drafting, perfecting, maintaining, and enforcing UCC security interests for com-panies operating across the U.S. and Canada.