As a business owner, you are faced with a new reality these days: even the most solid-looking corporate customers can fail, jeopardizing your cash flow because of their bad debt. But there is a way to protect your company from this danger.
If you resort to a lawsuit to get payment from a deadbeat client, it can take six months or more for you to get a judgment, and it is possible that a judgment in your favor may not result in your receiving cash. A better solution is to persuade the client to give you a security agreement and a Uniform Commercial Code (UCC) filing. There is no guarantee that the client’s bankruptcy process will result in your being paid. But your UCC filing does put you in a more advantageous position than other unprotected creditors.
New changes to the UCC mean that it is easier for you to protect yourself and your business as a creditor. A security agreement and a UCC-1 form insure your receivables. A UCC places a lien, or encumbrance, against a specific business asset. With a UCC filing, a creditor who has made a loan against an asset gains an advantage over other creditors because a public claim has been made.
Depending on laws in your state, you need to go to the Secretary of State or the county recorder to record the UCC. In the course of running credit checks on your customers, you may learn that they are already bound by UCC filings from other vendors or banks. Be sure to check for other UCC filings against your customers before extending them credit, and insist on a security agreement to collateralize the credit you do offer. Lastly, be certain that these security agreements are recorded by filing a UCC-1 form.
Filing a UCC and negotiating a security agreement during the sales process ends up being much less expensive than engaging in a protracted court battle after default. A qualified business attorney can draft a security agreement quickly, resulting in a brief contract that ties an asset to the debt. This contract can then be used as a basic part of your regular sales order or invoice. Additionally, new UCC regulations permit security agreements to be included in an electronic order system or e-mail. Once you and the client have a written security agreement, you should file a UCC-1 form with the state or county; this will serve as a record the obligation. Filing fees are minimal and you can easily do it yourself. By filing a UCC you circumvent the possibility of a lengthy court case, and you are afforded the right to take some action before a client winds up in bankruptcy.
When the UCC is in place, your clients will be aware that nonpayment has real consequences, with the result that they may well take the debt more seriously. Consequently, your delinquent accounts may decrease, improving cash flow. The return on investment can be significant. Should a client not pay for whatever reason, the UCC provides you the right to demand or even seize the collateral. If necessary, you can get a court order and a sheriff’s assistance. You are then permitted to auction off the collateral, and keep as much of the proceeds as are needed to pay the debt and recover your collection expenses. Any amount beyond that must be returned to the customer.
Since laws vary slightly from state to state, speaking with your attorney may be the best place to start. Done properly, UCC filings can be an important tool for achieving stronger cash flow and superior credit.