What Is a UCC Filing & How a UCC Lien Works
This article is part of a larger series on Business Financing.
A Uniform Commercial Code (UCC) filing is used by lenders to lower the risk of issuing a loan as it gives it the right to take possession of assets in the event of a default. It is common with collateralized loans and may be required by lenders as a condition of issuing a loan approval. Even if not required by a lender, it can help a borrower qualify for lower rates.
It is used to create a UCC lien, and the terms can dictate that a lien be placed on a single asset or a group of assets. The UCC is a set of rules that govern commercial transactions. For a UCC lien to be placed on any asset, a borrower must agree to it.
Lenders like Bluevine may require you to agree to a UCC lien in exchange for getting approved for a small business line of credit. These credit lines, however, can be used for any number of business purposes. Bluevine offers up to $250,000 in funding in as little as 24 hours.
How a UCC Lien Works
If you’re wondering how a UCC lien works, here are the typical steps it goes through starting from when the loan is issued, to when the loan is paid in full and the lien is removed.
1. You apply for a loan.
Some lenders will let you know upfront whether any collateral or UCC lien is required as a condition of getting the loan. Other times, the requirement for a UCC lien will be determined after completing a full review of your file. UCC liens are common with equipment loans, but may also apply to real estate, vehicles, or any other loan where the asset has substantial value.
For other potential requirements, view our guide for common small business loan requirements.
2. The lender issues an approval with terms and conditions.
If you are approved for the loan, you’ll then be notified of what the remaining requirements and terms will be. This is when you’ll typically be notified whether the lender will require a UCC lien, as well as the specific terms. For instance, some lenders will only need a UCC lien to be placed on a single asset, while others may need the lien to encompass a group of assets.
3. The lender completes the UCC filing.
If you agree to the terms of the loan, you’ll then need to sign the final set of loan documents that gives the lender permission to file the UCC lien on your assets. The lender will submit a UCC financing statement with your state’s secretary of state. The UCC financing statement is a document that details the asset the lender has a claim to.
UCC filings are a matter of public record and can be viewed by most individuals to let others know that a lender has a security interest in the collateral.
4. The UCC lien is removed when the loan is paid off.
UCC liens are good for an initial period of five years, after which a lender can continue to renew the filing if the loan still has a balance. However, if you pay off the loan more quickly, you can have it removed faster. Removal of liens is a process that may sometimes take several months, but you can always request to have it expedited if you need it removed for the purposes of pledging the collateral for another type of business loan.
When UCC Liens Are Used
UCC liens can be used for nearly any type of loan. This can include lines of credit, equipment loans, working capital loans, and more. Lenders can have it as a blanket requirement as a condition of issuing a particular type of loan. It can also require it on a case-by-case basis, depending on the strength of a business loan application.
UCC liens can also be filed on many different types of assets. This can include titled assets such as vehicles, as well as nontitled assets. Some other common examples include:
- Commercial instruments
- Factoring contracts
- Inventory
- Investment securities
- Large operating equipment
- Letters of credit
- Office equipment
- Real estate
- Receivables
- Vehicles
Why UCC Liens Are Used
UCC liens are used by lenders as a way to reduce their risk of lending out money. Because a UCC lien allows a lender to take possession of an asset if you do not follow the terms of a loan agreement, it gives the lender the ability to then sell the asset to recoup financial losses.
Liens also help ensure that ownership cannot be transferred without the loan first being satisfied. This is because buyers will typically conduct a search for active UCC liens before purchasing an asset, and will not proceed with the transaction unless it is delivered free and clear of any such liens or other ownership claims.
Types of UCC Filings
Two types of UCC filings can be used by lenders. A UCC filing can be used to place a lien against a single asset, or it can be used to place a blanket lien against multiple assets.
1. UCC Lien Against a Single Asset
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 that specific piece of equipment.
2. Blanket UCC Lien Against Multiple Assets
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 Financing Statement
Lenders use a UCC financing statement to file a UCC lien against assets. An example of what a UCC financing statement looks like is shown below. It contains information about the company that holds the interest in the asset, a description of the asset, the borrower’s information, and details about what type of lien it is.
UCC_1 financing statement example
How a UCC Filing Affects You
A UCC filing can negatively impact you in a few instances. If you default on your loan, you could be forced to give up the assets secured by the UCC lien. It could also affect your ability to get other loans. Here are some more scenarios and details on how a UCC filing could affect your business.
1. It can impact your business credit negatively.
While a UCC filing by itself may not negatively impact your credit score, creditors can and often do consider factors other than your score. Your business credit report will show UCC liens filed within the past five years, and creditors may view your business less favorably if you have had too many recent liens, applications for credit, or a high dollar amount of outstanding loans.
2. You can lose assets if you default on the loan.
A UCC lien gives a lender the right to repossess your assets if you do not adhere to the terms of the loan agreement. This usually occurs if you fail to make payments in a timely manner, and the terms of your specific loan agreement can dictate when a repossession may occur based on things like the frequency and severity of late payments.
3. You have fewer assets to pledge for other loans.
When you agree to have a UCC lien placed against your assets, it will be more difficult for you to use that same asset as collateral for subsequent loans. While it is possible to have multiple liens against the same asset, UCC liens operate on a first come first served basis. This means that in the event of a loan default, the lender that filed the first UCC lien will have priority in receiving sales proceeds to offset financial losses. As a result, lenders in a second or third lien position would be less likely to receive funds.
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.
How To Check for UCC Liens
There are two ways you can check to see if an asset of yours has a UCC lien. Your first option is to check your loan agreement to determine whether you authorized the company to file a lien. You may have also been provided a copy of a UCC-1 financing statement, which should contain a description of the asset it is secured by.
You can also do a UCC filing search by using the NASS public UCC search tool.
Financing Options Without a UCC Lien
If you don’t want, or are unable, to have a lien placed on your assets, you may still have a few options to get financing. You’ll need to determine if it’s a requirement for the specific loan you’re trying to get, and whether there are other types of loans that may not have a UCC filing requirement:
- If a UCC lien is required on a case-by-case basis: If it’s not a universal requirement but the lender is asking you for it, your business credit or finances may not be strong enough to warrant a loan approval without the security of a UCC lien. If this is the case, try asking the lender if you can forgo the lien requirement if you strengthen other areas of your loan application. Some examples may include placing a larger down payment or improving your credit scores.
- If all loans require a UCC lien: Some loans may require a UCC lien regardless of a company’s qualifications. If this is the case, you’ll need to find another type of loan, possibly with another lender, that does not carry this requirement. This can include some credit lines, working capital loans, or other unsecured business loans.
Frequently Asked Questions (FAQs)
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.
Yes, 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.
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.
Bottom Line
A UCC filing is commonly used by lenders as part of a secured loan, such as equipment financing. It reduces the lender’s risk because it gives it the ability to take possession of the item should you default on the loan. While UCC filings can make it more difficult for you to obtain subsequent financing, they can also help you secure more favorable rates and terms for the existing loan. Be sure to check out our guide on how to get a small business loan for tips on not only improving your approval odds but also getting more competitive rates and terms.
