Purchase Money Security Interest (PMSI)

Purchase Money Security Interest (PMSI)

A purchase money security interest (PMSI) is a special type of secured interest that gives a lender priority over other creditors in the goods it financed. If the borrower defaults, the PMSI holder can repossess the financed goods or claim their cash value ahead of competing secured parties—provided the statutory perfection and notice requirements are met.

Key takeaways

• PMSI secures the creditor in the specific goods purchased with the loan proceeds, granting priority over other secured creditors if properly perfected.
• Perfection typically requires filing a UCC-1 financing statement and, in some cases, giving notice to other secured parties.
• Different rules apply to inventory (stricter) and non-inventory collateral (more flexible).
• A properly perfected PMSI can take priority over earlier blanket liens under the Uniform Commercial Code (UCC).

How PMSI works

When a creditor lends money (or sells goods on credit) and that money is used to buy specific collateral, the creditor can obtain a security interest in those goods. The PMSI allows that creditor to leapfrog earlier or competing secured claims if the creditor follows statutory filing and notification rules. Common uses include:
* Retail point-of-sale financing (retailer finances a purchase and retains a security interest in the sold goods).
* Business-to-business financing for equipment or inventory.
* Consumer loans tied directly to the purchased item (e.g., vehicle loans).

Most states follow Article 9 of the Uniform Commercial Code (UCC) to determine how PMSIs are created, perfected, and enforced.

PMSI under the UCC

The UCC generally ranks secured parties by the order their interests were perfected (first-to-file or first-to-perfect). A PMSI is an exception: if the PMSI holder complies with specific perfection and notice provisions, it can take priority over previously perfected interests, including blanket liens.

Key rules by collateral type

Inventory collateral

To obtain priority for a PMSI in inventory, the secured party must:
1. Perfect the PMSI when the debtor receives possession of the inventory (or meet other statutory timing requirements).
2. File a UCC-1 financing statement identifying the collateral.
3. Give timely written notice to holders of conflicting security interests (the notice deadline and content are set by statute; typically the notice must be given before the debtor receives the inventory and not earlier than a statutory period).

These rules are strict because inventory is easily fungible and can move through a business quickly.

Non-inventory (consumer or equipment) collateral

Requirements are generally less strict:
* The creditor must show the loan proceeds were used to buy the specific collateral.
* A UCC-1 financing statement must be filed before the debtor takes possession or within 20 days after possession begins. If filing occurs after this 20-day window, the PMSI holder generally loses PMSI priority to other perfected interests.
Practical tips: pre-file the financing statement before delivery when possible and keep delivery and possession records.

How sellers and lenders establish a PMSI

To create and preserve a PMSI:
* Ensure the financing is used to acquire the specified collateral and document that link in the sales/loan agreement.
* File a UCC-1 financing statement that clearly describes the collateral.
* For inventory, provide the required written notice to other secured parties within the statutory timeframes.
* Maintain records (purchase orders, invoices, delivery receipts) that prove the timing of possession and payment.

Structuring: sellers sometimes sequence payments or contracts (for example, paying a manufacturer for a custom item before finalizing retail financing) to ensure the seller is the party that extended credit and thus qualifies for a PMSI.

Courts have allowed PMSI holders to recover related purchase costs (e.g., freight, taxes) when those costs are part of the financed amount and properly documented.

Priority over blanket liens

A properly perfected PMSI can take priority over an earlier perfected blanket lien, but only if the PMSI holder satisfies the applicable statutory perfection and notice requirements (for many types of collateral, this includes timely filing—often within 20 days of possession—or providing prior notice for inventory).

Example

A bank makes a loan to buy a new car and files a UCC-1 identifying the vehicle as collateral. Because the loan financed the car purchase and the bank perfected its security interest as required, the bank holds a PMSI in the vehicle and has priority to repossess it if the borrower defaults.

Practical checklist for obtaining PMSI protection

• Document that loan proceeds or credit financed the specific collateral.
• File a UCC-1 financing statement describing the collateral (pre-file when possible).
• For inventory, send the required written notice to other secured parties within statutory time limits.
• Keep delivery and possession records to support timing of perfection.
• Confirm state-specific UCC timing and notice rules.

Bottom line

A PMSI gives creditors strong, sometimes superior, rights in the goods they finance, but those rights depend on strict compliance with filing and notice rules under the UCC. Proper documentation, timely UCC-1 filings, and, when required, statutory notices are essential to achieving and preserving PMSI priority.