The principle objective of inventory financing is to provide the dealer with a line of credit to carry on his business. To achieve this objective, it is necessary that the dealer have power to sell the collateral, and to apply the proceeds to the purchase of other goods. Since a sale of the callateral by the dealer to a bona fide purchaser destroys the creditor's security interests in those goods, he obviously will not permit such disposition unless given protection in some other way. Therefore, to satisfy the demands of both the dealer and the financier, the security instrument must create what is termed a floating lien. This device simply allows the creditor's security intersts to transfer from the old goods to the newly-acquired inventory. As subsequent discussion indicates, this method of financing presented many legal problems before the adoption of the Uniform Commercial Code, and ultimately resulted in an unfriendly judicial attitude toward inventory financing. In attempting to alleviate this hostile attitude, the drafters of the Code have adopted the general philosophy that all security transactions should be made as simple and legally safe as possible. In this respect, the single and simple security provided by the Code is similar to that established by prior Kentucky law. Before the Code, Kentucky recognized the essential sameness of purpose of all the varied security devices, and treated almost all security transactions under chattel mortgage law.
Robert G. Lawson, Financing the Dealer's Inventory, 51 Ky. L.J. 142 (1962)
Kentucky Law Journal, Vol. 51, No. 1 (Fall 1962), pp. 142-153