What Is a UCC Filing & How a UCC Lien Works

A UCC lien filing, or UCC filing, is a notice lenders file when a business owner takes a loan against an asset. A UCC filing gives lenders a claim on assets a debtor pledges as collateral. The term originates from the Uniform Commercial Code (UCC), a set of rules governing commercial transactions.

Strong borrowers may qualify for business financing even if they have a UCC lien filed against them. For example, OnDeck, which sponsored this article and offers short-term business loans and lines of credit, will take the second position sometimes. Prequalifying online with OnDeck only takes 10 minutes.

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When a UCC Filing Occurs

When a business enters a financing agreement that a lender secures with collateral, like equipment, the lender may file a UCC lien against any assets the business pledges to secure the loan. A UCC lien rarely hurts a business’s day-to-day operations but could prevent it from selling assets or getting additional funding.

While other types of liens get filed because of something bad happening, such as not paying taxes, a UCC lien is a normal part of small business financing. The lien serves as a notice to all potential creditors that the borrower owes the lender money and that the lender has an interest in business assets until the business repays the debt.

Where a UCC Filing Comes From

A UCC filing begins when borrowers agree to pledge assets to a lender for a loan or business line of credit by signing a security agreement. A security agreement gives the lender the right to use specific assets as collateral. Once a borrower signs a security agreement, it is normal for a lender to file a UCC lien against the assets a business pledges to give notice of its rights to any other potential lenders.

Lenders can file UCC liens against businesses or individuals. They work on a first-come-first-serve basis, so if there is a default, the first lender to file a UCC lien will have the first rights to that asset. The lender is reserving its spot in line to collect on the assets a business pledges to them.

For example, let’s say Bank A files a UCC lien on equipment, and Bank B files a lien on the same equipment later. Bank A will get first rights to the equipment. If the business is in default and sells the asset to pay off debts, then Bank A will get repaid first. Bank B will only get money after the proceeds repay Bank A.

Lenders can file a UCC lien on assets that include:

• Office equipment
• Receivables
• Inventory
• Investment securities
• Large operating equipment
• Vehicles
• Real estate
• Commercial instruments, such as drafts or promissory notes
• Letters of credit
• Other goods used or owned by the business

UCC liens prevent businesses from getting multiple loans collateralized by the same assets. Before these notices came along, a business owner could get five loans on the same piece of farm equipment because none of the lenders knew about each other. Now anyone can do a public UCC search to determine what assets are available as collateral for a loan application process.

UCC Liens Offer Protection Across State Lines

In many cases, business transactions occur across state or country lines. As an example, companies based in New York sell products or services to businesses in California or other states. Every state has its own commercial transaction laws that could complicate the procedures to protest a business during financing transactions.

The UCC protects businesses with operations in different states by creating uniformity in how states deal with these transactions. UCC liens are a way for businesses to keep their financial interests when financing equipment, real estate, or taking business collateral for loans.

2 Common Types of UCC Liens

Lenders file a UCC lien when a business owes the lender money, and the lender wants to reserve its spot in line for the assets the business pledges. There are two common types of UCC filings a specific collateral lien and a blanket lien. A specific collateral lien gives the lender rights to a specific business asset like a piece of equipment. A blanket lien gives the lender rights to all business assets.

1. UCC Liens Against Specific Collateral

A UCC filing against specific collateral is when the creditor secures an interest in one or more assets but does not have an interest in all business assets. Borrowers are using specific assets as collateral to secure a loan or credit agreement. Specific collateral liens are most common for loans that have a specific purpose, such as equipment financing and inventory financing.

For example, business owners that finance a semi-truck can expect the lender to file a UCC lien and list the big rig as collateral. However, borrowers wouldn’t need to pledge assets beyond the financed truck.

2. UCC Blanket Liens

A UCC blanket lien occurs when a creditor secures an interest in every asset of a business. When a lender files a blanket lien against all assets, it becomes difficult to get additional funding for the business until it satisfies the lien, or the lender removes it.

Blanket liens are common for traditional bank loans, Small Business Administration (SBA) loans, and alternative business loans. SBA and traditional bank lenders use blanket liens to secure their loans. OnDeck and other alternative lenders use blanket liens when businesses do not have many hard assets for a loan. Using an alternative lender is sometimes the only way to get funding when a business does not have enough assets to satisfy a traditional lender.

All lenders like blanket liens because it secures their loan with all assets instead of one. A blanket lien can make the process of underwriting financing more flexible and allows lenders to provide quicker funding.

“Banks will often require a business to have specific collateral, like real estate, to qualify for a loan. By using a blanket lien and personal guarantee, alternative lenders can help healthy businesses gain access to capital without requiring specific collateral to secure the loan.”

―Ty Kiisel, Editor, OnDeck

Although most online lenders require a blanket lien, they are not the only lenders with the requirement. Inventory financing and invoice financing also require a blanket UCC lien, whereas short-term business loans and merchant cash advances may accept a second or third position in some circumstances.

UCC Liens for Common Business Loans

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How to Check a UCC Lien

Business owners unsure whether there is an outstanding UCC filing need not panic. All UCC filing statements are in the public record, and the state’s public UCC lien filing database stores them. Borrowers can search the database using their business information and view the identity of the lienholder along with a detailed description of the lien.

“A UCC lien is a notice and generally does not impact your business if you do not need additional funding. If you currently have a security agreement with a lender, then you should be able to use that as a guide to know what assets you potentially may have a UCC lien against.”

―Scott Applegate, Chief Operating Officer, CapitalPlus

Checking for UCC liens is easy. To start, business owners should have the UCC financing statement and know which state the lender filed the lien in.

1. UCC-1 Financing Statements

Lenders must file a UCC financing statement with the secretary of state in the state the borrower incorporated their business. Creditors file this to make a UCC claim “perfected” or valid. The UCC-1 financing statement describes the lien, the identity of the lienholder, and the identity of the debtor.

UCC-1 financing statement example

All UCC lien filings are public records that give notice to other potential lienholders or creditors what assets a borrower pledges as collateral. This secures the lender and ensures that borrowers cannot pledge the same asset for multiple financing products.

2. State-by-State Searchable UCC Lien Database

Exactly what is a UCC search? Each state has different ways to search for UCC filings, but borrowers can find them on the local secretary of state website. Most states allow business owners to search by the business or individual debtor names. However, sometimes, the functionality is more restricted.

How a UCC Filing Can Impact a Business

In most cases, a UCC filing will not have a direct impact on business operations. If business owners do not have any additional borrowing needs and do not default on a loan, then a UCC lien is not something they need to worry about. However, business owners should consider the risks associated with having a UCC filing against assets before starting a loan application process.

1. UCC Liens Could Prevent Additional Borrowing

The way UCC liens most often affect small business owners is by preventing them from getting additional financing before satisfying the existing lien. A UCC lien will prevent borrowers from getting most types of traditional business loans until they pay the lien off and could even hurt a business’s chances of qualifying for online business loans.

For example, a bank will want all the assets to be lien-free before it approves a loan. If a business has an SBA 7(a) loan or SBA 7(a) Express loan through a traditional bank, it will have a blanket UCC lien filed against all assets.

As discussed above, getting a bank to carve out any of its security interests for another lender can frustrate business owners, and attempts are often unsuccessful. An SBA borrower may find that they have the long-term financing that they need but lack the short-term working capital to bridge the business through its current situation.

Three options for getting financing with an existing UCC filing include:

1. Asking lenders to carve out assets from the blanket lien: Borrowers can try to get a lender to carve out certain assets from its blanket lien so that they can pledge those assets to another lender. This can be difficult and requires borrowers to convince lenders that getting additional financing will help the business.
2. Refinance the current loan: Borrowers can try to find a lender that will refinance the current loan and combine the balance with the additional financing needs into a single loan. This pays off the current lender and allows borrowers to pledge assets to the new lender.
3. Find a lender willing to take a second lien position: Business owners could also find a lender, such as OnDeck, that does not require a first position on collateral. These lenders can take a second position blanket lien on assets and focus on the business’s ability to make loan payments during the underwriting process.

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The loan process can be time-consuming, and it can cost money. Borrowers need to know before they start the process if any outstanding liens could prevent a lender from approving the loan. That is why it is a good practice to check what UCC liens are outstanding.

2. UCC Liens Could Impact a Business Credit Report

A business credit report shows all UCC liens for the past five years, which is a terrific place to identify any liens that lenders did not remove. The business credit report will contain several sections, with one of them devoted to UCC filings.

Sample business credit report with UCC liens:

Sample business credit report with UCC filings

While a UCC lien on a business credit report does not impact the business credit score, lenders that check business credit will see current and past UCC liens. The UCC liens they see will factor into the lending decision because a UCC lien reflects borrowing.

That borrowing―the amount borrowed, the payment history, and so on―will impact a business credit score. However, a UCC lien by itself is not something that forces small businesses to consider bad credit business loans.

3. Business Owners Risk Losing Pledged Assets

Taking out any loan has some risk to it. When a business pledges assets as collateral for a loan, it risks losing those assets if it defaults on the loan. If a lender files a UCC lien against a business, then those assets are at risk until the business repays the debt. While the UCC filing gives notice of a lender’s rights, it must take legal action to benefit from the UCC claim.

How to Remove a UCC Filing Lien

The first step to legally removing a UCC lien is to pay off the debt. State rules vary around releasing a UCC lien after a borrower satisfied the debt, but there are two main ways to remove them. One way is by having the lender file a UCC-3 Financing Statement Amendment. Another way to remove a UCC lien is by swearing an oath of full payment at the secretary of state office.

Liens will still show up in a UCC search for up to five years after the lender removes them, but the search will show that the UCC lien was satisfied. Although it will not be removed from the database, it will show that borrowers met obligations to the lender, and it no longer has any rights to business assets.

Business owners wondering how to remove a UCC filing have two options: Have the lender file a UCC-3 financing statement amendment or swear an oath of full payment to the lender.

1. Lender Files a UCC-3

Borrowers can request that a lender files a UCC-3 financing statement amendment. This will remove the UCC lien. States do not require lenders to file, and most won’t do it automatically. UCC liens expire automatically after five years, but a lender can renew it on long-term loans. Since they expire automatically, most lenders do not bother filing releases unless a borrower requests they do so.

Business owners can request the removal of a UCC lien with a final payment or some time after they pay off the loan. When the lender receives the release request, it starts filing the UCC-3 and confirms any filing.

OnDeck, for example, will send a copy of the paperwork it files with the state. Every release request should include the original UCC-1 filing number, a reference to the full payment, and an official request to release the lien.

Borrowers struggling to remove an outstanding UCC lien on their record can submit a letter to the lienholder. Using our free UCC Lien Removal Request Template makes the process easier and ensures that borrowers communicate everything to the UCC lien holder.

Blanket UCC-3 Financing Statement Amendment:

UCC-3 Financing Statement Amendment example

2. Swear an Oath of Full Payment

Business owners can go down to their secretary of state office and swear an oath that the debt has been paid in full. The state removes the lien after a borrower does this with a similar outcome to the lender filing a UCC-3. Lying about UCC liens can result in certain penalties that can include fines or jail time.

UCC Filing & UCC Lien Frequently Asked Questions (FAQs)

The article defines a UCC filing lien, gives borrowers options on borrowing with an existing UCC lien, and provides a guide to finding and removing a lien. Business owners asked some questions, which we’ve answered below.

Are UCC filings in the public record?

UCC filings are part of the public record, and individuals can search for a UCC filing through the secretary of state office UCC database. Once a UCC filing is made, individuals can find financing statements, security instruments, and federal tax liens and other types of lien filings in the database by business name or employer identification number (EIN).

Where do you file a UCC?

A lender can submit a UCC-1 filing at the secretary of state office. The office used must be the one where the business is incorporated. Some lenders have direct integration with a UCC filing system while other states offer an online process. Sometimes, lenders may have to submit a UCC filing by mail.

How do I find my UCC filings?

To find a UCC filing business owners can search for the secretary of state where their business is incorporated. Some states offer an online search function that uses the EIN of the business or the debtor name. Sometimes, the database restricts business owners to searching with the filing numbers.

Can you file a UCC-1 without a security agreement?

Lenders can’t file a UCC-1 without a security agreement from the borrower. A lender may file an initial statement only if the debtor allows the filing in an authenticated record or by authenticating a security agreement. If a lender issues a UCC-1 filing without borrower approval, its best to consult an attorney.

What happens when a UCC filing expires?

A UCC-1 financing statement expires after five years. Lenders can renew the filing for another five years on long-term loans. Once a UCC filing expires, the state considers it lapsed and removes the record after five years. Sometimes, lenders can prove that the debt is still active and reinstate the UCC filing.

Bottom Line

Business owners shouldn’t worry about UCC liens because the only potential drawback to having a UCC filing is not being able to get additional funding using the same assets as collateral. Lenders may file a UCC lien against a business’s assets anytime a business owner enters into a financing agreement.

Businesses with a current UCC filing against that are looking for financing should consider a loan with OnDeck. OnDeck cares more about the business’s revenues than it does about collateral. It can fund up to $500,000 in one business day and offers a simple online application that takes 10 minutes.

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