What is a UCC filing, and how does it affect my business?
For small business owners looking to expand their business through financing, understanding UCC filings is important. Here, we’ll explain what a UCC is, how it can affect your business and how a UCC filing is removed once you pay back your loan.
TABLE OF CONTENTS
What is a UCC-1 Filing?
When you obtain a business loan, a lender will often put a UCC filing on record. A UCC filing – often referred to as a UCC-1 filing or a UCC-1 statement - is a declaration that a creditor has an interest in your personal or business assets or property and allows the lender to use those assets as collateral to secure the loan.
Lenders use the UCC-1 to place a lien on a particular piece of collateral, or all assets, belonging to a business or person. More on these different types of filings in a minute.
UCC stands for Uniform Commercial Code, which is essentially a group of collaboratively written (or ‘uniform’) laws that help separate states enact similar laws more easily. While the UCC is not a federal law, it is a set of laws that states have all adopted in order to make doing commercial transactions across the United States easier.
(There are multiple types of UCC filings, but a UCC-1 is the most common form. Therefore, "UCC filing" is most commonly understood to mean a "UCC-1" filing.)
What does UCC filing mean?
If you want to take out a business loan with a bank or financial institution, a lender will file a UCC lien against your personal or business, property or equipment.
A UCC filling on record against your business means that a lender has secured a debt with collateral from your business.
Your creditor will file a UCC-1 Financial Statement, which is the legal form that declares their interest in your business property or assets as collateral on your loan. By filing a UCC-1, the lender can legally seize or sell your assets if you default on their loan.
For example, if you own a construction company and secure equipment financing to buy a new truck, your lender will file a UCC lien against the vehicle. The lien will state that your lender has the right to repossess the truck should you fail to pay the loan back, and while you are paying off your loan, your vehicle will serve as collateral.
Not only does a UCC filing announce a lender’s interest in your assets or business, but the filing of a UCC creates a hierarchy of which assets can be seized, and in what order, if you default on your debt or declare bankruptcy.
For example, if you take out a 2nd loan from a second lender using the same assets as collateral as you used for a 1st loan, the second lender will not be able to recover the assets until the first lender is fully satisfied. (This is why UCC-1 filings are generally filed as soon as a loan is made.)
What can a UCC be filed against?
Lenders can file two types of UCC-1 liens:
Specific collateral liens
A specific collateral lien gives lenders the right to seize a specific piece of property like vehicles, heavy machinery, inventory or the equipment you have purchased with your loan. Therefore, these are most often used for inventory financing or equipment financing transactions.
A blanket lien is filed against all your personal or your business's assets. This type of lien gives a creditor a security interest in all of those assets. It’s commonly used for loans from banks and alternative lenders, as well as loans guaranteed by the Small Business Administration (SBA). Because blanket liens are secured by multiple assets, they are often less risky to lenders.
Either way, if you can’t pay your loan back, a UCC lien gives your lender the right to sell your assets to help repay what you have borrowed.
What if I already have a business loan?
If you already have a business loan, you might have a UCC-1 filed against your business. UCC-1s are a common requirement for most business loans, including:
Lenders must publish notices of liens publicly, and UCC-1 statements are commonly published in local newspapers. However, your lender may not personally contact you when they file a lien.
Your local Secretary of State's office can tell you if a lien has been filed against your business. Most states now have this information available on their website.
Alternatively, you can check your business credit report for this information. Three major credit bureaus maintain business credit reports. Those are:
What effect can a UCC filing have on my business?
A UCC lien allows potential lenders to see that your business already owes money to another creditor. New lenders may be hesitant to approve you for more business loans if you've borrowed a lot of money since they won’t get the first legal rights to your assets.
A UCC lien allows potential lenders to see that your business already owes money to another creditor.
The lender with the oldest UCC lien has the “first position” and gets the highest priority in seizing or selling your assets.
If you’ve already repaid your loan, your UCC lien may still be on record as a UCC lien isn’t automatically removed. Most lenders allow the lien to expire on its own, which can take up to five years.
How do I remove a UCC filing?
Once you’ve paid off a business loan, your lender should release your business from any claims on its assets. They should do so by filing a UCC termination statement with the Secretary of State’s office in your state.
However, sometimes there’s a time delay in this step, and it’s possible that outdated UCC filings will turn up in your business credit history. A good step is to immediately ask the lender in writing to cancel the lien when you’ve made your final payment on a loan.
It’s also good practice to monitor your business credit history to check for any UCC filings that are shown in error. You can check your business credit through any of the major business credit bureaus to see if UCC filings are present.
You can also go to your secretary of state’s website and conduct a UCC-1 filing search on your own business, just as any lender would do when considering a loan application for you. If you find a lien that shouldn’t be there, you can ask the lender to file the paperwork to remove it.
If you cannot get the lien removed by asking the lender, you can try to have it removed yourself. Visit your Secretary of State's office and request to have the UCC-1 removed. Some states will do this if you attest under oath that you have paid the loan off in full.
Are UCCs only beneficial to lenders?
UCCs are certainly beneficial to lenders. However, having a UCC-1 Statement filed against your business isn’t necessarily bad. Many companies take out business loans to help their businesses grow, buy new equipment or pay staff or invoices on time. A UCC can help you get access to funding from trusted financial providers.
A UCC filing should not negatively impact your credit score as long as you pay the loan on time. However, a UCC filing can affect your chances of success when applying for additional financing.
What’s most important is that business owners keep up to date with loan payments and keep track of the status of any UCC-1 filings made against their business. This will ensure you have the best chance to qualify for financing in the future.
Hopefully this deep dive into UCC filings gives you some insight into what they are, why they matter and how they might affect your business.
While a UCC filing is often a necessary step in obtaining the best financing for your business, make sure you understand all the terms of your loan agreement, what collateral is being used and what liens will be filed.
It’s a good idea in general to keep tabs on your personal credit and business credit to know any liens filed against you. An important final step with any loan is to make sure UCC liens are removed in a timely fashion once you pay back your debt. This will help ensure you are in the best positions to obtain credit in the future when you need it.
About the Author
Francesca Arnott is a freelance writer from New Zealand. She has a degree in journalism and a background in digital marketing, branding and social media. She has an interest in personal and business finance, and her work has been published in many online blogs and sites, including The Financial Diet.