What Is a UCC Filing & How Does a UCC Lien Work?
This article is part of a larger series on Business Financing.
Lenders use the uniform commercial code (UCC), a set of rules governing commercial transactions, to hold assets as collateral on loans and factoring contracts. Lenders register a UCC filing with the secretary of state in the state where a business owner is organized. A UCC filing holds a single asset or a group of assets as collateral, creating a UCC lien against those assets.
The UCC lien prevents the business owner from selling the collateral or obtaining additional financing using the same collateral as security. UCC filings are first-come, first-served, meaning that if the borrower defaults on the loan, the first lender to have filed against the collateral will have the first rights to the asset. Liens expire automatically after five years, although lenders can renew them on long-term loans.
Lenders like Bluevine use blanket UCC filings, which hold assets as collateral for its small business line of credit. You can get a line of credit of up to $250,000 in as little as 24 hours with Bluevine.
When Are UCC Liens Used?
UCC liens are often used on nontitled equipment. While lenders can use UCC filings on titled vehicles, those liens are usually filed directly on the vehicle’s title. This direct form of lien filing makes it harder to transfer vehicle ownership without settling the lien.
Lenders can file liens on many types of assets, including:
- Commercial instruments
- Factoring contracts
- Investment securities
- Large operating equipment
- Letters of credit
- Office equipment
- Real estate
Anyone can check the status of UCC filings using a public UCC search provided on the National Association of Secretaries of State website.
If you’re purchasing equipment for your business, especially used equipment, it’s a good idea to see if there are existing UCC liens against the equipment before getting a small business loan. Also, familiarize yourself with small business loan requirements before you start the process.
Types of UCC filings
Lenders can use one of two types of UCC liens to secure assets in exchange for financing. A lender can file a UCC lien against specific collateral or use a blanket UCC filing to cover all business assets.
1. UCC Lien Against Specific Collateral
When a lender files a UCC lien against specific collateral, the lender secures interest in one or more assets but not against all company assets. This is most common when purchasing equipment and for inventory financing. For example, a farmer who buys a piece of farm equipment would have a UCC lien filed by the lender on just that specific piece of equipment.
2. Blanket UCC Filing
In some cases, a lien against specific collateral may not provide the necessary security for the lender. In this case, the lender would file a blanket UCC lien over all of a company’s assets. This provides more security to the lender and allows the business owner to borrow larger amounts of money. However, blanket liens can make it challenging for the business to get additional funding until the lien is satisfied or the lender removes it.
The UCC-1 Financing Statement
Lenders must file a UCC financing statement with the secretary of state in the state where the borrower incorporated their business. If the collateral is real property as part of a mortgage, a UCC filing should also be recorded where the property is located. Creditors file this to make a UCC claim valid. The UCC-1 financing statement describes the lien, the identity of the lienholder, and the identity of the debtor.
All UCC lien filings are public records and notify other potential lienholders or creditors that the assets a borrower pledges as collateral are encumbered. This secures the collateral for the lender and ensures that borrowers cannot pledge the same asset for multiple financing products.
Effects of a UCC Filing
A UCC lien only impacts a business if it needs to borrow additional funds or defaults on a loan. Otherwise, a UCC filing has little to no effect on a business’s operations. However, you should consider the following risks associated with UCC filings before applying for a loan:
Impacts Business Credit
Your business credit report will show all UCC liens for the past five years. This is an excellent way to see if there are liens on your credit that the lender didn’t remove after the lien was satisfied. While a UCC lien won’t impact your business credit score, lenders can see existing liens, payment history, and amounts borrowed on business loans. Potential lenders can use this information in loan decisions.
Prevents Use of Collateral for Other Loans
If assets are tied up in a UCC filing, especially with a blanket UCC lien, a business owner cannot use them as collateral for additional loans. Because UCC liens are first come, first served, a lender usually won’t take a second position behind a previous UCC filing because the risk is too great in case of default.
Three options for getting financing with an existing UCC filing include:
- Asking lenders to carve out assets from the blanket lien: A lender might be willing to release some collateral from a blanket lien so it can be used as collateral for a new loan. However, this can be difficult, as the lender with the UCC blanket filing must have sufficient value in the remaining collateral to consider releasing assets.
- Refinancing the current loan: In many cases, to change the collateral on an existing loan, the loan will have to be refinanced. In this case, the collateral can be changed so certain assets aren’t included in the refinanced loan.
- Finding a lender willing to take a second lien position: Maybe the most difficult of the three is finding a lender willing to take the risk of being behind another lender in lien positioning. A business must be well-qualified and have strong credit for a lender to consider taking such a risk.
Puts Collateral at Risk
Any secured loan comes with the risk that the lender could repossess the collateral if the borrower defaults on the loan. A UCC filing is no different. If a borrower defaults on a loan secured by a UCC lien, the lender can take legal action to repossess and potentially sell the collateral to avoid a charged-off loan.
How To Remove a UCC Lien
The first step to removing a UCC lien is to pay off the loan. Lenders must release the collateral from a loan when it has been satisfied. When the loan has been satisfied, the lender will file a UCC-3 financing statement amendment which removes the UCC lien. If the borrower is struggling to remove a UCC lien, then the borrower can submit a letter to the lienholder.
A borrower can also swear an oath of full payment with the secretary of state’s office. The state will then remove the UCC lien. Lying about UCC liens can result in specific penalties, including fines or jail time, so be sure the loan has been paid in full before going this route.
To check to see if a lien has been released, the National Association of Secretaries of State (NASS) has provided links to each state’s UCC lien information. Review your initial UCC-1 financing statement for details on how the lien is listed with the state.
Frequently Asked Questions (FAQs)
Can a UCC lien take money from your bank account?
If you default on a business loan with a UCC lien attached to it, the bank could get a judgment against your business, allowing them to repossess the assets listed in the UCC filing. The bank could sell those assets to try to pay off the remaining loan balance. If the sale of assets doesn’t satisfy the loan, the bank could go after other business assets, including cash, to pay off the remaining balance.
Does a UCC filing show up on your credit?
UCC filings will show up on your business credit report for up to five years. If you use your personal credit to take out a loan, which includes a UCC filing, a UCC lien won’t show up on your personal credit report. However, if the loan becomes delinquent and is turned over to a collection agency, this may show up on both your business and personal credit reports, depending on whether you used your company’s credit or your personal credit for the loan.
Does UCC filing hurt your credit?
A UCC filing won’t necessarily hurt your credit. Having a UCC lien on your business credit report doesn’t indicate your company’s ability to pay off the loan associated with the filing. If your business needs to take out additional credit trade lines in the future, then it will be judged by past payment performance and the ability to pay the new loan, regardless of how many outstanding UCC liens appear on your credit.
A UCC filing is a common practice for lenders providing equipment financing to businesses. As long as the lien is satisfied, the only potential drawback might be the limited ability to obtain additional financing for the company until the lien is released. You should make sure liens are released after loans are satisfied so the collateral can be used for additional financing, if needed.