If you lease or finance leases for equipment of any kind, be it a forklift, a copier, an oven, furniture, or a solar panel, there are only three rules of business you need to remember: perfect, perfect, perfect. But that’s only one word, you say. True, but as we discuss below, that one word is critically important.
Leasing a piece of equipment is no different than loaning someone money. You expect to be paid a return on your asset during the lease period. However, if the lessee encounters financial trouble during the lease and files bankruptcy, or even goes out of business, what happens to your forklift, copier, oven, furniture, or solar panel? Do you get them back? Or are they liquidated to pay off creditors? And what happens to your investment in that equipment or the remaining money owed on the lease? Where do you stand in line to be paid off? Are you even in the line at all?
If you don’t know the answer to these questions, you need to find out — otherwise you’re putting yourself and your asset(s) at risk. Fortunately, you’ve come to the right place to learn the answer.
First, a definition: For the purposes of this discussion, “equipment” is defined as something you lease to someone which the lessee (or debtor) will retain for use in their business or home. We’re not talking about inventory that will later be sold by your customer, such as cars or trucks at a dealership. That’s a different topic.
Now, let’s say you’ve agreed to lease the equipment. What do you need to do to mitigate your risk and protect your position? Under the Uniform Commercial Code (UCC), you need to file (or perfect) a lien with the state in which that equipment is located, within 20 days of delivery (what “delivery” ultimately means is legally left up to you, the lessor, although it’s best to be consistent in all cases). Why? Because the lien ensures your place in the line of creditors should the lessee or debtor file bankruptcy or go out of business. With a perfected lien in place, you become a secured creditor.
In most cases for liens, it’s “first filed, first served” (unless a government or taxing entity is involved, in which case they’re almost always at the front of the line). If another business or bank has filed a lien against the lessee before you, then they would have first dibs on assets.
However, the UCC has a special provision called Purchase Money Security Interest (PMSI) designed especially to protect equipment lessors. Provided you properly file or perfect a lien, this key provision gives you first priority on recovering your own equipment in the case of bankruptcy or non-payment. But — and this is critically important — you have to file (or perfect) to be covered.
Delay or failure to file or perfect a lien puts you, your equipment, your investment in that equipment, and perhaps even your entire business at risk. Without a perfected lien, you could lose any or all of them should you wind up trying to recover in bankruptcy court. Secured creditors always come first when it comes to dividing the lessee’s assets, and without a perfected lien, you are not secured.