Let us begin by saying that this article does not deal with posting armed guards outside your business or putting bars on your windows and chains on your front door. Instead we will be discussing the benefits of improving your security for customer indebtedness.
Whether you are a seller of goods and services on trade credit, a commercial lender, or commercial landlord, there will be times when your customer/client/tenant defaults in their payment obligation to you. To make matters worse, in today’s lean economic times, you can expect more defaulting businesses to be filing for ankruptcy protection.
One way to improve potentially your standing and the odds of collection is to obtain a security interest in your customer’s property, including inventory, furniture, fixtures, business equipment and accounts receivable. This is accomplished by having your customer sign what is known as a “security agreement”, which is simply a pledge of the business assets as security for the customer’s indebtedness to you. The security interest is “perfected” by filing Form UCC-1 with the Pennsylvania Secretary of State. (This is similar to a mortgage lien against real estate.)
If your customer is in default and is asking you for time to “work things out” it makes good sense to attempt to improve your security by requiring a security interest in the customer’s property. This will improve the likelihood that you get paid in the case of a bankruptcy and will also give you a seat at the table if your customer later seeks financing from another source who is also seeking a security interest in the customer’s property, as the new lender will want to remove your lien before making its loan.
Give us a call if you begin feeling insecure.
– Kevin Palmer