This article is part of a larger series on Business Financing.
A uniform commercial code (UCC) filing is a notice registered by a lender when a loan is taken out against a single asset or a group of assets. A UCC filing creates a lien against the collateral a borrower pledges for a business loan. The uniform commercial code is a set of rules governing commercial transactions.
When a business owner receives financing secured by collateral, a lender can file a UCC lien against the assets pledged by the business owner. This secures the loan or the factoring contract.
The 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 automatically expire after five years, although they can be renewed on long-term loans.
When Are UCC Liens Used?
UCC liens are often used on non-titled equipment. While UCC filings can be used 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 the ownership of the vehicle without settling the lien.
Lenders can file liens on many types of assets, including:
- Commercial instruments
- 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.
Types of UCC filings
Lenders can use one of two types of UCC liens when securing assets in exchange for financing. A lender can file a UCC lien against specific collateral, or the lender can use a blanket UCC filing to cover all business assets.
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.
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. 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 give notice to 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 did not remove after the lien was satisfied. While a UCC lien will not 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 will not be able to use them as collateral for additional loans. Because UCC liens are first come, first served, a lender usually will not 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.
- Refinance 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 are not included in the refinanced loan.
- Find 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 likely will have to be well qualified with strong credit for a lender to consider taking such a risk.
Puts Collateral at Risk
Any secured loan comes with the risk that the collateral could be repossessed 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 are required to 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, they 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 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.
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.