Financing statements: Overview, definition, and example
What are financing statements?
A financing statement is a legal document used to give notice to the public that a creditor has a security interest in a debtor's property or assets. This document is typically filed in a public registry, such as the U.S. public records system under the Uniform Commercial Code (UCC), to establish a secured interest in personal property, such as equipment, inventory, or accounts receivable.
The financing statement serves as a formal notice that the creditor holds a lien or claim on the debtor’s assets, which secures a loan or other form of credit extended to the debtor. By filing the financing statement, the creditor protects their rights and establishes priority over other potential creditors who may have claims on the same collateral. It is often required as part of the process of securing a loan or credit facility.
Why are financing statements important?
Financing statements are important because they publicly record the existence of a security interest, providing protection to both the creditor and the debtor. For the creditor, it ensures that their claim to the debtor’s property is legally recognized and has priority in case of default. For the debtor, filing a financing statement can help prevent future claims by other creditors on the same assets.
For businesses, financing statements are essential tools in managing and protecting secured lending relationships, as they provide clear, documented evidence of the collateral backing a loan. They also help avoid potential disputes over asset ownership in case of bankruptcy or liquidation.
Understanding financing statements through an example
Imagine a small business that borrows $100,000 from a bank to expand its operations. The bank agrees to lend the money on the condition that the loan is secured by the business’s equipment and inventory. To protect its interest, the bank files a financing statement with the relevant state authority, listing the specific assets (equipment and inventory) that serve as collateral. If the business defaults on the loan, the financing statement ensures that the bank has priority over other creditors when it comes to claiming the assets.
In another example, a company enters into a loan agreement with a supplier to purchase raw materials. The supplier files a financing statement to secure the goods until they are paid for. If the company fails to make the payment, the supplier can use the financing statement to repossess the materials or claim other assets that were pledged as collateral.
An example of a financing statement clause
Here’s how a financing statement clause might look in a loan agreement:
“As collateral for the loan, the Borrower agrees to grant the Lender a security interest in all present and future assets, including but not limited to inventory, equipment, and accounts receivable. The Borrower authorizes the Lender to file a financing statement with the appropriate governmental authority to perfect the security interest and establish the Lender’s priority claim to the collateral.”
Conclusion
Financing statements are critical tools used in secured transactions to provide public notice of a creditor’s legal interest in a debtor’s property or assets. By filing a financing statement, creditors establish priority over other claims, protecting their rights in the event of default. For businesses, understanding and properly filing financing statements is essential for securing financing, protecting assets, and ensuring clear ownership and claim rights in the case of financial difficulty.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.