Know the Game
Lucky for you the law has taken an aim at protecting businesses like your own. Taking the risk to sell your goods to the unknown public is frightening, but it's business. Creditors and banks have always had the power to maintain control over a debtor's assets after a default. This is typically what you hear of in a bankruptcy—the bank comes in, takes everything and tells you as a lower level creditor, "good bye." They are able to do this because their lending agreements provide them with a right to retain security interests in "after-acquired" goods, equipment, and inventory. Guess what applies as "after-acquired"? Your goods. Well, producers/sellers/suppliers have the same rights, they just need to be savvy enough to know how to use them. You have been given a tool called the Purchase Money Security Interest (PMSI). This is a Uniform Commercial Code (UCC), a body of law which applies to the states (UCC §9-103), providing the seller of goods a trump card over banks.
Plan, Plan and Plan
A merchant needs to know what it takes to protect itself from risky business. It's important to plan ahead and understand the necessary steps into protecting yourself from loss. A merchant needs to know what a PMSI is, when it is created, how it is created and how it is preserved. A PMSI arises when the creditor/seller (You) sells the goods to the debtor/buyer on credit. The sale results in your retaining an automatic security interest in the goods for all or part of the purchase price. This is a right however, by itself, a subordinate right to that of a bank. The right attaches to the property upon delivery to the buyer. The PMSI MUST be perfected in a manner devised by the UCC. A seller will need a standard Security Agreement (UCC §9-203) and a Financing Statement, (§9-310/312). Your lawyer can assist with the drafting of these instruments. Many states, including Washington provide free Financing Statement forms. A Security Agreement is a more customized document
Preserving Your Interest by Filing
Generally, a PMSI perfects automatically—but only in consumer goods like vacuums, rugs, chairs and other things being sold for consumer use. For items which are classified as equipment and inventory (check the UCC or consult your attorney for the definitions of various goods) you will need to perfect the PMSI by filing in accordance with state law. Filing in WA takes place in the Department of Licensing, located in Olympia. In other states like OH and LA, filing is accomplished through the Secretary of State or the local equivalent department. In order to file, you will need to have a fully-executed Security Agreement and Financing Statement, illustrating the rights preserved by the PMSI and then have those documents filed TIMELY. There are strict time requirements and your attorney can assist you with ensuring that filing is done properly and timely. Online filing has simplified the process. Many states provide easy-to-use online filing to expedite claims.
Finish Perfecting Your Claim and Send Notice
A final step requires the filer to notify those with present interests. Typically, this means the bank that has a business line of credit with your customer. You can access the bank's, or other creditor's, filings through your state's Secretary of State or applicable office (WA's Department of Licensing provides access via http://www.dol.wa.gov/business/UCC/). Once again there are time requirements for delivery of this notice. Please ensure that the notice is sent timely.
Replicate and Learn the Process for Yourself
Preserving security interests is somewhat of a daunting process, but certainly something you can learn by doing it once or twice. Your attorney can draft you a master agreement that can be used for all of your sales. Once you have mastered this technique it is possible that it can be done in house by your managers or administrators. What you need to realize is that companies and banks do this every day. There are so many filings that states have devoted resources to making filing more streamlined and simplified for the everyday user. The savvy business owner will find a way to implement these interests into their everyday business operations. The task of fighting for your goods in bankruptcy is dead-end road. But taking the time to use valid security instruments may help you to save your goods from the bankruptcy heap—saving you from your own financial troubles.