UCC 1 Perfection by Filing

Under the Uniform Commercial Code (the UCC), each State has the right to establish a system for recording UCC-1 Financing Statements.  Under Article 9 of the Uniform Commercial Code, these Financing Statements are used by a creditor to give notice that they hold a security interest in the asset(s) identified in the Financing Statement.  The Financing Statement itself is a document stating that a secured party has a claim on specific assets pledged by the debtor company as collateral. 

Once assets to be pledged as collateral are identified by the debtor, the next step in becoming a secured creditor involves getting the debtor to sign a Security Agreement. This Security Agreement is a contract that grants security to the creditor in asset(s) of the debtor and includes a detailed description of the pledged collateral. The seller must obtain and maintain the documentary requirements mandated under the  Uniform Commercial Code.  The UCC -1 listing the collateral your company holds as security must be filed with the appropriate state and in some cases local government offices.  The underlying Security Agreement is usually filed along with the UCC-1 Financing Statement.

One problem with perfection by filing is that each State determines where UCC-1 Forms must be filed. Some States have established a central filing requirement - often with the Office of the Secretary of State (or the equivalent). Some States have unique filing requirements.  In a State with a dual filing requirement, a creditor that files one time will not have a perfected security interest. In some States with dual filing requirements, if a customer has offices in more than one County a creditor must either:

• File only with the State agency, or
• File in every County in which the customer has a place of business

Credit managers that are not comfortable with handling the process of perfecting a security interest have two basic choices. They can:

• Use a third party filing service. The advantage of using a filing service is low cost combined with a certain amount of expertise, and occasionally advice intended to help the creditor avoid pitfalls and problems. 
• Use an attorney. The advantage of using an attorney is that he or she will be able to offer advice to the creditor in addition to preparing and processing the documents necessary to perfect a security interest. The disadvantage of using an attorney is the higher cost.

My suggestion is to ask your customers to sign a UCC-1 financing statement even if you have no intention of perfecting it.  Having this document on file may convince the debtor that you are a secured creditor, and as a result you may be paid sooner than other unsecured creditors.

© 2011 by Michael C. Dennis.  All Rights Reserved.  Michael is the author of "Credit and Collection Handbook."