In these poor economic times, entrepreneurs may be witnessing neighbors in small business struggling with bad debts owed to them. Uncollected payments can quickly cascade into cash flow trouble for the small business owner. After all, credit is tight, and a small business is only as viable as the money coming in. If it is not a bank financing secured car and real estate loans, how can a business make sure that its interests will be protected when one of its customers is unable to pay its bills?

Extending credit as a secured party creditor may be more effective than costly collection agencies as a means of recouping bad debt. As a secured party creditor, entrepreneurs have rights to property belonging to a debtor if an invoice remains unpaid. Due to manufacturing processes, it may be impossible to take possession of the material listed on the unpaid invoice. A secured party creditor, however, can hold alternate property as collateral.

The first step to becoming a secured party creditor is to execute a security agreement with the borrower. Some small businesses may be reluctant to treat their customers as borrowers. However, implementing a secured interest relationship with a troubled customer may be a safe way to prevent severing a long-term business relationship. In the security agreement, the creditor should include the repayment terms and the definition of default, including the date the payment is due, the amount of the payment, the amount of time it must be past due to constitute the redemption process. The security agreement must be signed by both the debtor and the creditor.

After the security agreement is signed, it is time to execute the UCC-1 form. This form, originating from the Uniform Commercial Code, is an essential component to a secured loan. Depending on the state, these forms are most likely found at the Secretary of State's office. On this form, the creditor must list the property that is to serve as collateral. To uphold the claim, it is important that this description be as specific as possible. Once the collateral is listed clearly, both the borrower and the creditor sign the form.

The Uniform Commercial Code UCC-1 form is not valid until it is filed. Again depending on the state, this form will most likely need to be filed with the Secretary of State. The UCC-1 serves as a public notice that the property in question serves as collateral for the security agreement between the creditor and the borrower.

With the UCC-1 form filed properly, a small business will now have the assurance that it can recoup losses in the event that a customer defaults on payment. Some small businesses may be reluctant to require security for debts. However, by extending credit in these times while minimizing risks, entrepreneurs may likely be attracting more customers than small businesses who insist on stringent credit standards.