The ABCs of Purchase-Money Security Interest (PMSI): A Guide for Lenders

Are you thinking about lending money? This can be a great way of earning money. Especially in a crisis like COVID when people are going to be in much need of cash to help tide them over through lockdowns and a lack of customers. 

One loan that you can offer is a purchase-money security interest. But what exactly are such loans and how can you use them to your advantage? 

Here’s everything you need to know.

Collateral Damage and Standard Secured Credit 

In a standard secured credit facility, a creditor grants a borrower a loan to secure the borrower’s assets, including any property purchased before the loan is completed.

After closing, the lender submits a UCC financing declaration in the right state or county. Remember every state including D.C. has slightly different laws on how these work.

This ensures that it has perfected the lien on the collateral. Lenders may be surprised to learn that once the acquisition property has perfected the security interest, it becomes secondary to the PMSI or Purchase Money Security Interest held by the seller or another party that pays for borrowers “purchases of inventory, equipment, and other assets.  

As a creditor, a PMSI service has the ability to take precedence over a primary or perfect security interest. A deviation to the “first to file” rule (UCC 9-322 (a)), which sets the priority for most securities and interests, gives priority to PMSI.

To form a PMSI, UCC needs a close link between the acquisition of collateral and the secured obligation. The buyer grants the good seller a security interest if the goods are secured by a payment that is deferred of the purchase price.

Don’t forget about getting a purchase-money security interest form to assist you. 

Security Interests 

The buyer may also be granted a security interest if the lender advances to him mean enabling him to buy the goods from the seller without securing such an advance. In short, PMSI is a security interest in an asset secured by credit that enables the debtor to acquire and use the asset.  

For example, if the purchaser purchases goods in exchange for cash to obtain a loan at a later date and the lender secures a collateral portion of the purchased goods to obtain the loan, the secured interest rate does not meet the requirements of a PMSI.

Securities Contracts 

To obtain a PMSI, the purchaser must conclude a securities contract.

This grants a nonpurcahse-money security interest in the goods sold to the creditor, whether the seller or the lender. The creditor must complete the security interest on the goods by filing a UCC financing declaration in the appropriate jurisdiction (in most cases the jurisdiction of the purchaser’s organization). The creditor then receives the PMSI.

The PMSI is a priority. According to UCC 9-324 (a), the creditor must perfect his PMSI for goods other than inventory or livestock within 20 days of receiving the collateral from the purchaser and within that period the purchaser takes precedence over a first purchase-money security interest in the perfect or near-perfect PSMI.

This shall apply even if the PSSI holder, who is known as the secured party, has previously deposited the securities under the Acquired Property Clause. If the PSMSI is not perfect within the 20-day period, priority is determined by the normal rule of first filing (UCC 9: 322 (a)).

Purchase-Money Security Interest: A Great Way to Lend

If you want a great way to lend money during these times then you can’t go wrong with a purchase-money security interest. 

With all the issues of COVID making it hard for people to access money, you could be someone’s savior and really help them out of a tough time. Be sure to do your research first about all the small clauses.

If you are interested in learning more about a purchase-money security interest be sure to check out the rest of our site.