While considering loans to grow your business, you’ll often have to do something fairly risky: put up some of your assets as collateral. Exposing your property to seizure if you fail to repay your loans can be scary, and so too can learning that your creditor has taken a Uniform Commercial Code (UCC) lien on your collateral. You can check to see whether you have a UCC lien on your business by doing a UCC search, but keep in mind that what you see shouldn’t worry you – UCC filing is a standard part of taking out loans for a small business.
What is the Uniform Commercial Code?
The Uniform Commercial Code (UCC) is a nationally standardized group of rules and regulations that govern all American business transactions. The government first implemented UCC codes to allow for interstate business transactions without requiring each participant to adhere closely to each state’s unique individual laws.
Through the UCC, companies in different states can adhere to a common set of legal and contractual principles. That’s why almost all the states have entirely adopted the UCC, with minor variations by state. The code includes nine articles that provide guidance for banking, loans, and many other types of business transactions.
What is a UCC filing?
A UCC filing, also known as a UCC-1 Financing Statement, is a legal form a creditor uses to indicate that it’s interested in the business or personal property a debtor has put up as collateral. If you have business debts, then your creditors are likely to make UCC filings in case you fail to repay the money you’ve owed. Once your creditor makes a UCC filing, they gain the ability to claim a lien on the property in question, which then officially becomes your collateral.
How do UCC liens work?
When a creditor issues a UCC lien on your property, they have the legal authority to seize it as collateral if you fall behind on your debt repayment. If you default on your loans or file for bankruptcy, your creditor can permanently keep the property (or, in the case of a home, foreclose on it). On the other hand, if you repay your loans, you should retain control of your property just fine.
Even if your creditor fully predicts you’ll entirely repay your loan, they might still file a UCC lien on whatever property you put up as collateral. That’s OK – having a UCC lien filed on your business only minimally impacts its day-to-day operations. You might not be able to sell certain assets or obtain additional funding when you have a UCC lien, but otherwise, UCC liens are just normal, everyday business financing concerns.
Three steps taken during UCC filings
If you take out a small business loan involving collateral, your creditor will take the following steps to file a UCC lien on your company.
1. Contact your business state’s secretary of state
In all matters related to UCC filing, the secretary of the state in which your company operates will be the point of contact. That’s why your creditor will file their UCC-1 Financing Statement with the appropriate representative at your secretary of state’s office.
2. Provide identifying information
When your creditor moves to establish a UCC lien on your collateral, they must provide relevant identifying information. Usually, just the name and address of both your company and the creditor will suffice, but certain states may ask creditors to provide more information.
3. Reasonable indication of the collateral
In a UCC filing, there must be a reasonable indication (legally known as the “sufficiency of description”) of what the collateral is, no matter how many items or how much land is involved. To reasonably identify your collateral, your creditor can use any descriptor such as category or quantity. Only phrases including or similar to “all the debtor's assets” or “all the debtor's personal property” are forbidden.
Key questions to keep in mind for UCC filings
Any time you provide collateral as part of a loan, you should check whether your creditor has placed a UCC filing on your company. You can do so using a UCC search.
What is a UCC search?
A UCC search is a process through which business owners contact the secretary of state for the state in which their business is located and request all their UCC information. In some states, you won’t have to contact your secretary of state’s office at all – instead, you can use an online database for UCC lookup.
Why should I perform a UCC search?
As previously stated, UCC filings won’t have a dramatic impact on your day-to-day operations, but they can affect your funding and asset selling abilities. As funding goes, when you have a UCC lien out on your business, you will likely face far more challenges borrowing money.
Traditional lenders such as banks typically prefer borrowers with no UCC liens, and you might encounter the same problem with online business loans.
Can I still obtain funding with a UCC lien?
Yes, you can find other funding routes with UCC liens on your business. Other possibilities include:
- Carving out assets. You can ask the creditor in control of your UCC lien to free some assets in their control for your use as collateral for other loans. Although most creditors will decline this request, you are within your rights to ask.
- Refinancing loans. You can search for a new lender who may be able to refinance your loan. This lender will consolidate your loan and your refinancing into one new, larger loan that may relieve your debt to the first creditor.
- Borrowing from second-lien lenders. Some creditors may be willing and able to take second position on collateral. In this arrangement, your original creditor retains primary rights to your collateral. A second-lien loan is high-risk for creditors, so they’re uncommon but certainly not impossible to find.
On what types of property can creditors place UCC liens?
In theory, creditors can place UCC liens on any type of property. In reality, creditors mostly apply UCC liens to land, real estate, and business assets.
How do UCC liens impact credit scores?
UCC liens do not directly impact your credit score, but lenders will often see them on your company’s credit report. All UCC liens in your name over the last five years will appear on your credit report.
How long do UCC liens last?
UCC liens expire after five years unless the lender renews them. If you see a fulfilled UCC lien still listed on your business credit report, you can contact your lender to ask them to properly close the lien.
How can I remove a UCC lien in my name?
Once you’ve repaid your debt, you can ask your lender to file a UCC-3 Financing Statement Amendment to remove your lien. You can also swear an oath of full payment to your secretary of state’s office. Once your UCC lien is removed, you’ll have a much easier time accessing funding for your business.
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