For the purpose of this article, we will focus on inventory and non-inventory, which can be defined as follows: There are different types of collateral in which the creditor may be able to obtain a PMSI, including inventory, non-inventory, farm products, and software. And in return, the debtor grants the creditor a security interest in those goods. In other words, a PMSI is created when a creditor loans money to a debtor to finance the purchase of certain goods. UCC Section 9-103(b)(1) provides a fundamental definition: “A security interest in goods is a purchase money security interest…to the extent that the goods are purchase-money collateral with respect to that security interest.” PMSI creditors can get super priority over third parties who perfected their interests first. It gives secured creditors who meet its requirements a special advantage to jump ahead in line of other creditors with respect to certain collateral. What is a PMSI?Ī purchase money security interest (PMSI) is an exception to the first-in-time rule. This is the type of scenario where a purchase-money security interest (PMSI) can save the day. The only issue is that Big Bank already has a first position lien. While there are other lenders willing to lend to Unique Toys at higher rates, they request a first position lien on the borrower’s assets. Big Bank is not willing to lend the additional funds. Unique Toys also just received a $1 million purchase order from a major retailer, which would require an upfront payment to the factory of $400,000. While the business is profitable, the company is still low on cash. The business loan from Big Bank is secured by all Unique Toys’ assets, and helps the company start its business. with an existing business loan from Big Bank. Now, let’s imagine there is a debtor - a toy manufacturing company called Unique Toys, Inc. It also gives the secured creditor priority to recover in bankruptcy. This practice is in line with the “first-in-time” rule of UCC Article 9 and protects secured creditors in the event the borrower defaults on the loan. In the transactional world, lenders strive to ensure that loans are secured by properly perfected liens against the borrower’s collateral.
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