Purchase Money Security Interest (PMSI)
Candlefocus EditorPMSI grants security interest rights to retailers and suppliers to protect commercial loan transactions concerning inventory goods and non-inventory goods. In order for a PMSI to be valid, retailers and suppliers must adhere to a strict protocol.
In the case of inventory goods, the lender must notify all other parties with potential security interest claims against the borrower or buyer and their collateral, as well as must file UCC-1 form before the borrower takes possession of the goods or within the first 20 days after possession. Non inventory goods, on the other hand require the filing of the UCC-1 form before the borrower takes possession of the goods. Painting how quickly the UCC-1 must be filed gives lenders with PMSI first-priority rights to collect on defaulted debt, even if all other parties have already filed security interest rights against the borrower or buyer and their collateral.
Lenders that obtain PMSI are also granted the rights to repossess goods purchased with the loan in the event of a default. This prevents other creditors from seizing the goods purchased on loan, even if those creditors filed their security interest claims prior to the lending party obtaining the goods.
Not Secure with PMSI
With all of the benefits that PMSI grants to lenders, there are goods and collateral that PMSI does not have security interest over. PMSI does not protect against goods acquired through theft, fraud, or other goods without a valid title. Additionally, PMSI does not protect against goods that have been repossessed, sold, or otherwise disposed of by the borrower without notifying the lender. Lastly, PMSI does not protect against claims of lien or other creditors that have legal judgments against the borrower or buyer, even if those claims were transferred prior to the lender providing the goods.
PMSI is an invaluable tool for retailers and suppliers to exercise their rights to ensure repayment on loans. It 1) prioritizes lenders in terms of security interest over goods 2) grants lenders the right to repossess goods and 3) prevents other creditors from seizing the goods even if they were first in filing security interest. Due to the protocol and limitations of PMSI, it is important for lenders to ensure that their security interests are filed promptly and properly in order to exercise their rights to the fullest extent.