Buying new equipment or inventory is often necessary to keep your business running. However, certain contract terms could make those purchases collateral for old debt. Reviewing your documents can help you avoid surprises when seeking financing or selling property.
When new purchases can become collateral
Under New York law, a security agreement may cover property you buy after signing it. This is called an after-acquired property clause.
If the contract creates a valid security interest, the lender’s claim may extend to covered property once your business gains rights in it. Depending on the wording, those assets may include:
- New inventory
- Replacement equipment or machinery
- Future accounts receivable
Not every new purchase is automatically covered. A perfected purchase-money security interest (PMSI) gives an equipment lender priority if filed within 20 days of delivery. Inventory has stricter rules. The lender must file and notify existing creditors before your business takes possession.
How to check what your creditor claims
Start with the security agreement you signed. Look for terms such as “after-acquired property,” “all assets,” “inventory,” “equipment” or “accounts.” Then compare that language with the UCC-1 financing statement and any amendments.
A UCC-1 is only public notice that a creditor claims an interest in certain property. It is not the agreement that creates the interest. For a registered business, search its formation state because that state generally governs the filing. For example, search Delaware for a Delaware LLC operating in New York.
Understand the lien before making your next move
A UCC lien can complicate a sale, refinancing plan or new funding opportunity. Getting guidance before you commit to a transaction can help you understand your options, avoid added financial pressure and move forward with a clearer plan.