PMSI: What you need to know before your next transaction
When it comes to equipment financing, collateral liens and the finance industry as a whole, one of the most important documents is the Uniform Commercial Code-Secured Transactions, or UCC for short. In this code is Article 9, which authorizes after-acquired collateral liens.
As a result, a secured party can now acquire the appropriate security interest for debtor-owned personal property assets as well as the debtor’s future assets. However, this naturally is skewed in favor of the secured party – not the debtor – and it requires an exception to level the playing field.
That exception is the Purchase Money Security Exchange Interest exception, or PMSI.
What is a PMSI?
PMSI is a specific type of security interest offered in the UCC, only applicable to goods and software. One of the unique elements of PMSI is its priority. It takes precedence over other, related types of security interest, so a creditor with a PMSI is extremely likely to take precedence over other types of security interests in the collateral.
For example, a seller of goods with a perfected PMSI will have priority over a lender who has a blanket security interest on those same goods.
At its core, a PMSI is designed to manage credit risks, granting that priority to the creditor over other creditors who hold security interests in the same goods or software. This exception is an ideal way to ensure all parties involved in a financing deal are operating as equals in the eyes of the law.
“A PMSI brings its own set of complexities that require attention.”
What are the nuances of a PMSI?
Unfortunately, the base definition of a PMSI only scratches the surface of what is involved with this type of security interest.
As previously stated, it is only applicable for transactions involving goods or software. However, “software” is only included if the software is acquired in a transaction where a PMSI is obtained for the goods related to the software. A transaction for only software is ineligible for a PMSI.
In addition, “goods” has a broad definition. It can include consumer goods, crops, inventory, equipment and even manufactured homes, among many other items.
The importance of a perfected PMSI
One other important consideration is the ability to perfect a PMSI. The super-priority of the security interest won’t be in effect should it not be perfected.
The rules for perfecting a PMSI vary depending on the type of goods involved in the transaction. For equipment, the debtor can perfect a PMSI when receiving possession of the collateral or within the first 20 days. It is not required to wait until receiving the goods, however, Article 9 of the UCC authorizes pre-filing to streamline the process. This can further mitigate risk when competing with other secured parties.
The important step is filing the correct financing statements with the appropriate filing agency or secretary of state. This must be completed in the state where the customer’s legal entity is based.
No matter the type of goods or software, a PMSI must be perfected in order for the interested party to obtain the security interest. The differences arise in the methods required to perfect the PMSI.
Consult with experts before moving forward
Should a PMSI sound like a viable option for your next transaction, make sure you consult with the appropriate legal counsel or financing experts beforehand. Feel free to contact Eastern Funding for any questions related to equipment financing and your laundromat needs.
This article was written by Frank Peretore, Esq.
Frank Peretore, Esq. is a founding partner of the law firm of Peretore & Peretore, P.C.with offices located in both New York and New Jersey. He is a Georgetown Law graduate with over 28 years experience in representing national and regional financial institutions from the transactional and financing stages through the litigation stage in the state, federal and bankruptcy courts. He also represents creditors in general commercial litigation and commercial foreclosure matters.
Mr. Peretore is the author of Workouts and Enforcements for the Secured Creditor and Equipment Lessor, Lexis/Nexis, 2015, and Secured Transactions for the Practitioner: How to properly Perfect Your Personal Property Lien and Assure Priority, 2015. He also publishes articles in a variety of legal publications such as the Law Journal Newsletter, Leasing News, NEFA Newsline, and New Jersey Law Journal. Mr. Peretore is a frequent public speaker on equipment leasing and secured commercial lending.
Additionally, Mr. Peretore has held the following Board and Legal Positions: Board of Directors, National Equipment Finance Association, 2009- 2013 Secretary, National Equipment Finance Association, 2012-2013 Board of Editors, Law Journal Newsletter Equipment Leasing Newsletter, 2011-present Credit & Collections Committee, Equipment Leasing & Finance Association, 2012-present Legal Chair, National Equipment Finance Association, 2009-2010 Legal Committee, National Equipment Finance Association, 2009-present Board of Directors, Eastern Association of Equipment Lessors (EAEL) 2007-2008 Legal Chair, Eastern Association of Equipment Lessors, 2002. If you have any questions or would like to contact him, please call (973) 729-8991.