3JM Company Inc.

Published Articles by David Balovich

Published in: Creditworthy News
Date: 8/26/98

This is the third in a series of articles pertaining to Article 9 of the UCC.

In this installment of our series on Article 9 of the UCC we will address the difference between a general security agreement and the purchase money security filing.

The majority of businesses do not secure their sales because of the cost and time required to perfect a security agreement. Under a general security filing, each new sale requires new documentation be obtained from the customer and perfection of the new documents. This is often looked upon as a negative in becoming a secured creditor along with the fact that if any other business or bank has previously filed then they have first rights to the collateral.

The positive aspect of a general security filing is that it can secure old or new debt and no further consideration is required on the part of the creditor.

A purchase money security interest is one that is taken by the seller of the collateral to secure all or part of its price or taken by a person who by making advances or incurring an obligation gives value to enable the debtor to acquire rights in or the use of collateral if such value is in fact so used. (9-107). Sellers of inventory, equipment or consumer goods or those companies who purchase these goods for their customers (floor-plan companies) may take and perfect a purchase money security agreement.

The benefit of doing so means that only one filing is necessary regardless of how many sales are made and the filing can be continued. The taking of the purchase money security interest is not expensive nor is it time consuming. It is a vehicle that permits every seller of inventory, equipment and consumer goods to be a secured creditor.

The further benefit of a PMSI is that the creditor is first filed in their collateral regardless of any other creditor or bank filing before them.

The negative aspect of the PMSI is that perfection requires that new debt be given. Unlike a general security filing a PMSI only secures new debt. It may not be used to secure past due indebtedness.

In the next column we will discuss the necessary steps that must be taken to perfect a general security agreement and a PMSI.

I wish you well.

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