SBA lenders are seeing more requests to finance online retail businesses which sell products either directly to consumers or through major online retail platforms, such as Amazon or Walmart. Much of the value of these businesses are in the inventory they sell online. Considering how to perfect and protect its lien in the Borrower’s inventory is an important step in a Lender’s underwriting analysis, the keys being how the inventory is acquired, where the inventory is stored and how it is shipped to customers.
Under Article 9 of the Uniform Commercial Code, a lien on inventory is perfected by filing a financing statement against the inventory in the office where the debtor is organized (i.e. which, in most states, is the Secretary of State’s office). While the Lender may be successful in obtaining a perfected lien in the inventory, its lien may lose priority due to the rights of the warehouseman or bailee who is handling, storing and shipping the inventory on behalf of a Borrower. Under Section 7-209 of the UCC, warehousemen or baliees are entitled to a statutory lien on the goods being held if they provide a bill of lading or warehouseman receipt to a Borrower (or bailor), which generally identifies (i) the location of the warehouse where the goods are stored, (ii) the date of the receipt, (iii) the storage rate and handling charges, and (iv) the description of the goods or how they are packed. If signed by a warehouseman, then the warehouseman will have a valid lien on the goods it is storing. The Warehouseman’s lien allows the Warehouseman to hold and sell goods in its possession to offset against any shipping, handling and storage fees owed by the Borrower.
Challenges arise for a Lender when there is a dispute between the Borrower and its Warehouseman. The Warehouseman can easily disrupt the Borrower’s business by holding and refusing to ship goods per Borrower’s instruction. This in turn can result in the Borrower being unable to make payments and cause an Event of Default under the loan documents. Understanding the Borrower’s sale cycle, including addressing how much Borrower pays and when it must pay a warehouseman fees should be considered when looking at projected cash flow for a potential Borrower. Further, if an Event of Default has occurred under the Loan, a Lender must anticipate that the Warehouseman may block the Lender from access to audit, and/or sell or remove the inventory if it choses to exercise its own Warehouseman’s lien on the goods. Any of these scenarios may prevent a Lender from realizing on its perfected lien on the inventory.
The good news is that a Warehouseman’s lien can be waived by agreement. This is why obtaining a Warehouseman Agreement is critical for any Lender relying on inventory to secure its loan. Some key points to look for in a warehouseman agreement is an acknowledgement by the Warehouseman that any right, title and interest, arising by contract or statute in the goods, including without limitation, any Warehouseman Lien, is subordinate to the Lender’s lien, right, title and interest in the goods stored by or in the possession of the Warehouseman.
The Warehouseman Agreement should also (i) identify the location of all warehouse locations, (ii) confirm that the warehouse agreement between Warehouseman and Lender is current, and no amounts is due and owing, (iii) require Warehouseman to give notice of default under the warehouse agreement to Lender, and (iv) grant Lender, or its designees, access to the goods for audit, inspection and sale of the goods. Further, the Lender may wish to include in the Warehouseman’s Agreement a provision stating that should Lender exercise its remedies against the goods, the Warehouseman shall assist the Lender in the collection, packing and shipping of the goods, as requested by Lender, for a commercially reasonable per diem fee based on its then current market rates.
While requiring a Warehouseman’s Agreement is always a good idea, its not always practical when dealing with large on-line retailers such as Amazon or Walmart that store, ship and collect payment on behalf of its vendors. These larger retailers generally will not sign a Warehouseman’s Agreement. As a result, the Lender will have to determine if the inventory is actually available as collateral and, in its credit memo, indicate its true value. It may also choose to look for other available collateral, such as real estate, trademarks, patents or cash collateral.
If you have questions about Warehouseman’s agreements, or perfecting your interest in collateral, please visit our website at www.starfieldsmith.com or call us at 215.542.7070