UCC Article 9 Types of Collateral Classification Help - Equipment vs Inventory Debate
So I'm preparing a UCC-1 filing and getting completely confused about how to properly classify collateral under Article 9. The debtor runs a small manufacturing operation and I'm not sure if their CNC machines should be classified as equipment or inventory since they sometimes sell refurbished units to other shops. The loan officer is pushing me to be more specific than just 'all assets' but I don't want to mess up the collateral description and have issues with perfection later. Anyone dealt with UCC Article 9 types of collateral classification where the same assets could fall into multiple categories? I've seen equipment, inventory, accounts, chattel paper, instruments, documents, general intangibles, and deposit accounts mentioned but the boundaries seem blurry in practice.
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Daniela Rossi
The key is looking at how the debtor uses the property in their business operations. If the CNC machines are primarily used in manufacturing (their main business), they're equipment. The fact that they occasionally sell refurbished units doesn't change the primary classification. You want to be specific enough to perfect your interest but not so narrow that you miss assets.
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Sophie Hernandez
•That makes sense about primary use. So even if they sell maybe 2-3 refurbished machines per year, as long as manufacturing is the main purpose, it stays equipment classification?
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Ryan Kim
•Exactly right. The occasional sales don't transform equipment into inventory. Think of it like a restaurant that occasionally sells their old ovens - still equipment, not inventory.
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Zoe Walker
I always get nervous about collateral descriptions being too broad or too narrow. Had a filing rejected once because I listed 'machinery' instead of 'equipment' and the SOS system flagged it as unclear. Now I try to use the exact Article 9 terminology.
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Daniela Rossi
•Which state was that? Most states are pretty flexible with collateral descriptions as long as they reasonably identify the property.
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Zoe Walker
•Michigan. Their portal can be really picky about terminology. Learned to stick with the UCC definitions after that headache.
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Elijah Brown
For manufacturing operations, I typically see: Equipment (machines, tools), Inventory (raw materials, work-in-progress, finished goods), Accounts (receivables), and General Intangibles (patents, trademarks). Your CNC situation is definitely equipment based on primary use test.
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Sophie Hernandez
•Should I list each category separately or can I do something like 'all equipment, inventory, accounts, and general intangibles'?
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Elijah Brown
•I usually list them separately for clarity, especially with equipment where you might want to be more specific about types of machinery if the loan is equipment-specific.
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Maria Gonzalez
•Just make sure whatever you choose matches what's in your security agreement. The UCC-1 should mirror the security agreement's collateral description.
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Natalie Chen
Had a similar issue last month with a client who had restaurant equipment but also sold some pieces to other restaurants. I was going in circles trying to figure out the classification until I found Certana.ai's document checker. You can upload your security agreement and proposed UCC-1 and it instantly flags any mismatches in collateral descriptions. Saved me hours of second-guessing myself.
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Santiago Martinez
•Never heard of that tool. Does it actually understand the nuances of Article 9 classifications or just do basic text matching?
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Natalie Chen
•It's pretty sophisticated - caught that I had 'machinery' in one doc and 'equipment' in another, plus flagged potential gaps in my collateral coverage. Worth checking out if you do a lot of UCC filings.
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Samantha Johnson
The Article 9 categories aren't mutually exclusive in some cases. Same property can be equipment to one party and inventory to another. But for YOUR filing, focus on how YOUR debtor uses it. Manufacturing equipment = equipment classification, period.
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Sophie Hernandez
•Interesting point about same property having different classifications depending on the party. Never thought about it that way.
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Daniela Rossi
•Right, like a car dealer's vehicles are inventory, but if they lease one for their own business use, that one becomes equipment for them.
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Nick Kravitz
Don't overthink it! Equipment, inventory, accounts, general intangibles - covers 90% of business collateral. The CNC machines are obviously equipment since that's their primary business use. File it and move on.
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Zoe Walker
•I wish I could be that casual about it. One wrong classification and you could have perfection issues if you need to foreclose.
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Nick Kravitz
•True, but the primary use test is pretty straightforward here. Not like it's a close call.
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Ryan Kim
Here's the Article 9 breakdown I always reference: Equipment (used in business operations), Inventory (held for sale), Accounts (payment rights), Chattel Paper (records showing both debt and security interest), Instruments (negotiable like promissory notes), Documents (bills of lading, warehouse receipts), General Intangibles (patents, copyrights), Deposit Accounts (bank accounts). Your CNCs are clearly Equipment.
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Sophie Hernandez
•This is super helpful. I'm saving this breakdown. So chattel paper would be like equipment leases where there's both a payment obligation and security interest?
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Ryan Kim
•Exactly! Like auto financing contracts where the lender has both the right to payment and a security interest in the vehicle.
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Hannah White
•Deposit accounts always trip people up because you need control, not just filing, for perfection in most cases.
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Maria Gonzalez
Quick tip - if you're unsure about classification, look at how similar businesses describe their assets in their financial statements or insurance policies. Manufacturers always classify production machinery as equipment, not inventory.
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Sophie Hernandez
•Good thinking. I'll check their insurance schedule to see how they classify the CNC machines.
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Michael Green
The UCC Article 9 types of collateral seem complicated but they're really based on common sense business usage. Equipment = tools of the trade, Inventory = stuff you sell, Accounts = money owed to you. Everything else is more specialized.
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Zoe Walker
•I like that simplification. Takes some of the mystery out of it.
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Mateo Silva
•Yeah, until you get into mixed-use assets or businesses that blur the lines. But for straightforward manufacturing, it's pretty clear cut.
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Victoria Jones
Just finished a UCC audit where we had to reclassify a bunch of collateral because the original filer didn't understand Article 9 categories. Cost the client thousands in attorney fees to clean up. Better to get it right the first time.
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Sophie Hernandez
•Yikes, that's exactly what I'm trying to avoid. What was the main issue in that case?
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Victoria Jones
•They classified everything as 'goods' instead of using proper equipment/inventory distinctions. Made it unclear what was actually covered when they needed to enforce.
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Zoe Walker
•This is why I stress about getting the terminology exactly right. One vague description can cause major problems later.
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Samantha Johnson
Bottom line for your CNC situation: primary use = manufacturing = equipment classification. The occasional sales don't change that fundamental relationship. List as equipment and you're good to go.
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Sophie Hernandez
•Perfect, that's the confirmation I needed. Going with equipment classification for the CNC machines. Thanks everyone for the help understanding Article 9 collateral types!
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Mateo Sanchez
Great discussion on the primary use test! One thing to add - when documenting your rationale for equipment classification, consider including a brief description in your security agreement about how the CNC machines are "used or bought for use primarily in business operations" rather than "held for sale or lease." This language mirrors the UCC definitions and can help support your classification decision if it's ever questioned. Also, for mixed-use assets like yours, some attorneys recommend including a clause that covers "all replacements, substitutions, and proceeds" to catch any scenario where equipment might temporarily shift categories.
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Jenna Sloan
•This is really valuable advice about the documentation approach! I hadn't thought about explicitly using the UCC definitional language in the security agreement itself. The "replacements, substitutions, and proceeds" clause sounds like great protection too - would that cover scenarios where they trade in old CNC machines for newer models? Also, when you mention "if it's ever questioned," are you thinking more about disputes with other creditors or issues during enforcement proceedings?
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