I recently received the
"Generally the banks secure themselves for their lending whereas most of
the time the mercantile credit managers have to extend unsecured credit. Do you think it
is fair that banks should have priority in security against other creditors. Will
appreciate your detail reply. Thank you in advance."
This week I would like to answer this question by briefly discussing Article
9 of the UCC, Secured Transactions.
I think there is some confusion on the part of credit managers and perhaps
the writer of this letter as to who can be a secured creditor. No mercantile credit
manager "has to extend unsecured credit". If they do so, it is only because of
company policy. In fact, every mercantile credit manager should only extend secured
Let's address this question. Why would our company want to give our
competitor or a bank the right to have our inventory, equipment, farm products or consumer
goods along with the proceeds as collateral for their debt and not ours? Common sense says
they would'nt but every time we sell our goods or provide services to a customer unsecured
we are providing our goods and the proceeds of those goods or services to a secured
Often the excuse for not being a secured creditor is that there are "too
many already filed ahead of us". Section 9.107 of the code allows for obtaining a
Purchase Money Security Interest. In this case, inventory or equipment of the creditor may
be retained as collateral, including proceeds, and when the filing is properly perfected
(9.302, 9.304, 9.305, 9.306, 9.312) the specified collateral is removed from any previous,
current or future filing of another creditor. This means the creditor who perfects a PMSI
becomes first filed in their collateral regardless of who filed first. In the case of
conflicting PMSI's where inventory or equipment is not "branded" then first
filed generally takes priority (9.312).
There is not sufficient space here to discuss all that is necessary to become
a properly secured creditor. I encourage you to become familiar with Article 9 of the UCC.
It can be found in the Credit Manual of Commercial Law (summary by state). The handbook
entitled the Portable UCC ( this is what I use ) which is a publication of the American
Bar Association and can be obtained from them. Every state also produces a publication on
the UCC, here in Texas it is entitled The Texas Business and Commerce Code.
In conclusion, do I think it is fair that banks have priority over mercantile
creditors? Absolutely! It is a level playing field and mercantile creditors are simply not
using all the rules available to win. Why should the banks be accused of unfair treatment
just because they take the steps necessary to protect their assets, loans receivable, and
we fail to adequately protect our accounts receivable?
They do not "take" our inventory, equipment and accounts receivable
to secure their loans, we "let" them have access to it.
Think about that!
I wish you well.