Special Considerations on the PMSI

As a credit manager, you should familiarize yourself with the PMSI procedure that is outlined in Article 9 of the Uniform Commercial Code (UCC), which is the standardized business regulation adopted by most states. The rules regarding a creditor's use of a PMSI are strict. As a secured creditor you must be able to prove that the goods were sold to the customer by your company.

Will the Secured Collateral Have Sufficient Value to Offset What is Owed?

There are some key things to understand in advance to determine if the liquidated collateral will have sufficient value to offset your company's credit exposure.

Will the asset's value decrease over time?

At the outset you should calibrate the volatility of the collateral's value. Will the value decrease widely over time? For example, if you are taking security on a product revised frequently, or where product pricing fluctuates, is there a strong likelihood any of your in a customer's inventory can be liquidated with adequate value to pay down what is owed to your company. Additionally, what are the costs to seize, restock and resell the secured product?

Will you have access to the asset, or will other creditors have a first claim?

Legally, creditors who are first in line to perfect a security agreement will be in first position to take ownership of the assets along with any liquidation proceeds. What if your company is not in first position? For example, let's say the customer's bank has a first claim “blanket lien” on all assets. Is there likely to be sufficient assets to offset what is owed to the bank with enough value left to pay your company?

With that said there are ways for a trade creditor to take a Purchase Money Security Interest (PMSI) on products shipped to the customer. If done properly, this lien will take precedence over other secured creditors, such as a bank. Banks typically have a blanket lien on all assets, including inventory.

Remember, once your product is sold it becomes very difficult to obtain payment for your secured product. The bank is likely to have first position on your customer's accounts receivable. You may have sold a component assembled into a finished good. It is unrealistic to seize something already sold by your customer from their customer.

Consider a “Blanket Lien” on All the Customer's Assets.

If your company is a highly valuable supplier, you can try to work with your customer and the bank to obtain a Blanket Lien on all the customer's assets. Combined with an Agreement subordinating your claim on assets to the lender, (Subordination Agreement) you may be able to put your company ahead of other trade creditors and next in line for all assets aside from your PMSI. If the bank is satisfied and your PMSI does not satisfy the debt, you can liquidate additional customer assets to pay the remaining balance.

Conclusion:

Trade creditors in any industry can leverage the tools available to secure the product shipped to a customer. Whether it is remaining in their inventory or supplied for a construction project. These tools provide opportunities to offset open balances and reduce the risk of selling to an otherwise high-risk customer. Understanding those possibilities can be a path to answering yes when a Sales Rep comes to you with a difficult prospect, benefiting your company's revenue and profit performance.