What a UCC Filing Means for Your Business
A UCC filing, or Uniform Commercial Code filing, is a legal form filed by a creditor when you use assets to secure a business loan. The filing establishes the creditor’s legal right to seize the collateral in the event you default on the loan. Here’s what to know about UCC filings, including how they work and what they mean for your business.
Key takeaways
- A UCC filing is a legal notice that indicates a lender’s claim on a borrower’s assets
- UCC filings typically lapse after five years (unless renewed)
- UCC filings generally don’t affect your business credit score
How does a UCC filing work?
A UCC filing, also known as a UCC lien, is a common part of business loan agreements that allows lenders to state their interests in a borrower’s assets as collateral for a loan.
In other words, it’s a legal document in which the lender essentially says, “If the borrower doesn’t repay their loan, I have the right to take the specific assets named in this document.” The filing also serves as a public notice to other lenders that a creditor has a claim to your property. UCC filings can cover a single asset or multiple assets.
In the case of a blanket lien, a lender has a claim on most, if not all of your business assets, which may include some of your future assets. Lenders may require blanket liens if a business has bad credit or doesn’t have high-value assets to use as collateral.
UCC filings can be attached to secured or unsecured loans
It’s important to note that some lenders may use the term “unsecured” to describe a loan without a specific asset tied to it. However, the lender can still seize collateral if you default on an unsecured loan. It’s essential to read your business loan agreement to understand what happens if you can no longer afford your loan payments.
What’s in a UCC filing?
Lenders submit UCC filings to the Secretary of State’s office in the state where you and your business live. A UCC filing may include the following information: your business name, your full name and address, the name and address of the creditor and a list of the collateral.
Various assets can be covered by a UCC lien, including:
- Equipment
- Inventory
- Business furniture
- Real estate
- Vehicles
- Accounts receivable
- Business savings accounts
Let’s say you own a small landscaping company. To expand your business, you decide to take out a loan from a local bank to purchase an additional work truck and lawn mower.
The bank agrees to lend you $40,000, but they want to ensure they have a legal claim to the truck and lawn mower in case you default on the loan. The truck and lawn mower serve as collateral to secure the loan.
The bank submits a UCC filing to your state’s Secretary of State office to formally record their interests in the property.
Types of UCC filings
UCC filings can be broken down by how they affect your assets and what forms they use.
Specific-asset vs. blanket liens
Two of the main types of UCC filings are specific-asset liens and blanket liens. Specific-asset liens, as the name suggests, cover a certain asset, such as a vehicle or piece of equipment. If you default on your loan, the lender can take the collateral.
A blanket lien, also known as an “all-asset lien,” means the lender puts a lien on most, if not all, of your business’s assets, which may include accounts receivables and present and future inventory. If you default on the loan, the lender can take your assets to cover its losses.
UCC-1 and UCC-3 filings
A UCC-1 filing is typically filed when you first take out your loan, while a UCC-3 filing is often used to amend the original UCC-1 filing.
Let’s break it down further:
- UCC-1: Also referred to as a “UCC-1 financing statement,” a UCC-1 forms the lien against a borrower’s asset or assets. The lender holds the rights to the property until you fully repay the debt.
- UCC-3: Form UCC-3 is a multiuse form lenders use to make changes to a UCC-1. There are various things you and your lender can do with this form, including:
- UCC-3 Amendment: Makes changes or corrections to Form UCC-1.
- UCC-3 Assignment: Used when a secured party has to assign or transfer its rights to the collateral.
- UCC-3 Continuation: Continues a UCC agreement for another five years. UCC filings expire after five years and need to be renewed for long-term business loans at least six months before the initial filing matures.
- UCC-3 Termination: Terminates the agreement and can be completed once the loan has been repaid in full. It publicly shows that the creditor no longer has a claim to the collateral.
- UCC-5 Information Statement: Notes that the original filing was inaccurate, wrongly filed or that someone who wasn’t allowed to file the UCC filed it.
In a typical business financing arrangement, the lender would file the initial UCC-1 with the loan agreement during loan origination. From there, anyone who has rights to the pledged assets could file a UCC-3 to make changes, though most states only accept one UCC-3 filing at a time.
How does a UCC filing affect your business?
Lenders primarily use UCC filings to publicly claim the rights to your business assets until you pay off your debt. But a UCC filing could have additional effects on your business.
Getting new loans
Obtaining additional financing can be challenging with an active UCC filing, especially if it’s a blanket lien. Since your existing creditor has first dibs on your assets in the event of default, other creditors may be reluctant to lend money to you. This is because any claims they have on your assets would be secondary to the first creditor, putting them at greater risk if you default.
Selling your business equipment
If your business equipment falls under a UCC lien, you must ask your creditor for permission to sell the equipment. For example, let’s say you’re a restaurant owner and want to sell your old commercial oven and use the funds, plus some cash from savings, to buy a new one. To sell the old oven, you’ll need to run it by your lender, and they have the right to say no.
Invoice factoring
A UCC filing is often attached to an invoice factoring agreement, which can affect your ability to get future funding. For example, let’s say you own a trucking business and use invoice factoring to boost your cash flow. After a year of using the factoring company, your truck breaks down. It’s going to be challenging to get a new truck loan, since lenders generally don’t want to loan money to someone with a blanket lien because your assets are already pledged as collateral to another creditor.
Do I have to agree to a UCC filing?
UCC filings are common among lenders, especially when providing small business loans. The good news is that having a UCC lien is unlikely to affect your business unless you can’t make your payments or try to get additional financing using the same assets as collateral or if you default on the loan.
It can be helpful to shop around and compare UCC filing requirements with multiple lenders. Some lenders may allow you to sign a personal guarantee instead of a UCC lien, which means you’ll be personally responsible for the debt if your business can’t repay the loan.
How to remove a UCC filing
You can remove a UCC filing after you’ve paid off your business loan. Once you pay off the loan, ask your lender to file a UCC-3 termination statement with the Secretary of State’s office. The UCC-3 form will terminate the lien and release the creditor’s claim on your assets.
It’s always a good idea to double-check the UCC-3 statement for accuracy and keep a copy of the document for your records.
How to find a UCC filing
UCC liens are typically held by the Secretary of State’s office in your state. You can find your Secretary of State’s website through this directory or by doing an internet search for your state’s name followed by “UCC lookup” or “UCC database.” Once you find the right website, you can check for any UCC filings under your name or your business’s name.
You may also be able to find information about your UCC filing by contacting your lender or checking your business credit report.
Frequently asked questions
You can find out if you have a UCC filing through your local Secretary of State’s office. Many Secretary of State websites have online databases, allowing you to easily search for UCC liens using your name or file number. You may also be able to find information about UCC filings on your business credit report.
UCC filings are typically valid for five years from the date of filing. In some cases, a creditor can extend the duration of the UCC filing for an additional five years.
A UCC filing generally doesn’t affect your business credit score unless you default on the loan. However, UCC filings will remain on your business credit report for at least five years.