Secured Financing of Inventory: Revolving Credit, UCC Perfection, Proceeds, Competing Liens

Description

Lenders making asset-based loans often include a borrower's inventory as part of the borrowing base. Structured as a line of credit secured by the borrower’s existing and after-acquired inventory and other assets, the loan balance is paid down as inventory is sold and can be redrawn to finance the production or acquisition of new inventory. Counsel must draft draw and repayment procedures with care.

The secured party will want a perfected security interest that takes priority over security interests or other interests in the inventory. For a perfected security interest, there must be both creation of the security interest under a security agreement and perfection by filing a UCC financing statement, taking possession of the collateral, or some other method.

Competing liens can add complexity to the transaction. Generally, the time of filing establishes priority, but there are notable exceptions to the first to file rule, including manufacturers, other suppliers or lenders with a purchase money security interest (PMSI). Counsel may wish to identify and address competing liens in loan and intercreditor agreements.

Listen as our authoritative panel examines issues particular to the financing of inventory. The panel will discuss critical provisions that should be included in the documentation of a revolving line of credit, perfecting and maintaining a first priority security interest in inventory, and dealing with competing security interests or other interests in the collateral.