A UCC filing, which stands for Uniform Commercial Code (UCC) lien filing, is a legal notice that lenders file to stake a claim in borrower assets in the event of default.
Basically, UCC liens can cover all or specific assets and can be filed against businesses or individuals and the term comes from rules governing commercial transactions in the United States. Strong borrowers are capable to qualify for business financing even if they have a UCC lien filed against them.
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Here, we layout and explain how a UCC filing might affect your business, particularly when it comes to securing high-quality small business financing. So, let’s take a detailed look at what UCC filing is and how it works.
Thus, it can be said that UCC filings or liens are legal forms that a creditor files to give notice that it has an interest in the personal or business property of a debtor.
Essentially, UCC lien filings give the authority to lenders to formally lay claim to collateral that a debtor pledges to secure their financing. The term is just a small part of a collection of rules established with the aim to control and regulate how commercial transactions work under the Uniform Commercial Code (UCC).
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UCC is also known as Uniform Acts, which can be defined as a collaboratively written laws that are meant to help enact identical or similar laws by separate states. First published in the year 1952, UCC is one of a number of acts that have been put into law with the goal of harmonizing the law of sales and other commercial transactions across the United States.
Essentially, UCC is just a huge list of laws. However, the aspect of the UCC which will be explained in this article and what your business really needs to know about is Article 1: General Provisions, which dictates UCC-1 Filings generally known as UCC filings.
When your business establishes a financing agreement that is secured by collateral, such as equipment, a UCC lien could be filed against any assets you pledged to secure the loan. A UCC lien does not generally affect your business’ day-to-day operations but could put you on hold from getting additional funding before satisfying the lien.
While other types of liens typically get filed because of something bad happening, such as not paying your taxes, a UCC lien is a normal part of small business financing. The lien, therefore, serves as notice to all potential creditors that you owe the lender’s money and that your assets are pledged to that lender until you repay the debt.
Generally, a UCC filing begins when you agree to pledge assets to a lender for a loan or business line of credit by signing a security agreement. A security agreement offers the lender some grans and rights to use specific assets as collateral.
Once that security agreement is signed, it is normal for a lender to file a UCC lien against the assets you pledged to give notice of their rights to any other potential lenders.
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Furthermore, UCC liens can also be filed against any businesses or individuals. As they claim to work on a ‘first come first serve’ basis. then if there is a default, the first lender to file a UCC lien will have first rights to that asset. The lender reserves their spot in line in order to collect on the assets you pledged to them.
For instance, let’s say if Bank A files a UCC lien on equipment, and Bank B files a lien on the same equipment later. In this example, Bank A will get first rights to the equipment. If the business is in default and the asset is sold to pay off debts, then Bank A will get repaid first. Bank B will only get money after Bank A has been completely repaid.
UCC liens stop businesses from obtaining multiple loans collateralized by the same assets. Before these notices come forward 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 to be used as collateral during a loan application process.
In many cases, business transactions take place across state or country lines. For instance, 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 can challenge the protection of businesses during financing transactions.
The Uniform Commercial Code (UCC) protects businesses with operations in different states by creating uniformity in how states deal with these transactions. UCC liens are defined as one way for businesses to keep their financial interests when financing equipment, real estate, or taking business collateral for loans.
A UCC lien is filed when you owe a lender money, and the lender wants to reserve its spot in line for the assets you pledged to them. There are two common types of UCC filings.
(a) Specific collateral lien
(b) Blanket lien
A specific collateral lien entitles a particular business asset like a piece of equipment. On the other hand, a blanket lien gives the lender rights to all your business assets. This is explained more in detail below.
A UCC filing against specific collateral is when the creditor has a security interest in one or more assets but does not have an interest in all of your business’s assets. In other words, you are using specific assets as collateral to secure your loan or credit agreement.
Specific collateral liens are ordinary for loans that have a specific objective, such as equipment financing and inventory financing. For instance, if you finance a semi-truck, you can expect the lender to file a UCC lien and list the big rig as collateral. However, you typically wouldn’t need to pledge assets beyond the financed truck.
A UCC blanket lien takes place when a creditor holds a security interest in every asset of your business. When a blanket lien is filed against all of your assets, then it becomes difficult to get additional funding for your business until the lien is satisfied and removed. Blanket liens are usual for traditional bank loans, Small Business Administration (SBA) loans, and alternative business loans.
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SBA and traditional bank lenders use blanket liens to secure their loan fully. They factor all of your assets into their lending decisions. Alternative lenders use blanket liens when businesses do not have a lot of hard assets for a loan. Using an alternative lender is sometimes the only way to get funding when your business does not have enough assets to satisfy a traditional lender.
All lenders typically like blanket liens because their loan is secured with all of your assets instead of just one. A blanket lien can make the underwriting process more flexible and allows lenders to provide funding more quickly.
Even though the many online lenders have a requirement of blanket lien, they are not the only lenders with the requirement. Typically, inventory financing and invoice financing also require a blanket UCC lien. Whereas, short-term business loans and merchant cash advances can accept a second or third position in some situations.
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A UCC lien is just a notice and generally does not impact your business if you do not need additional funding. If you still have a security agreement with a lender, then you must consider using that as a guide to know what assets you potentially may have a UCC lien against.
If you are unsure whether or not you have a UCC filing, you don’t need to panic. All UCC filing statements are in front of the public record and are stored in your state’s public UCC lien filing database. You can search the database using your business information and will be able to view the identity of the lien-holder along with a detailed description of the lien.
Checking for UCC liens is easy, Prior to conducting your research, keeping two important things in your head is quite necessary: “UCC financing statement and UCC lien search by state”.
A UCC financing statement to be filled with the state’s secretary of state in the state your business is incorporated. Creditors file this to make a UCC claim sensible. The UCC-1 financing statement contains a description of the lien, the identity of the lien-holder, and the identity of the debtor.
All UCC lien filings are public records that make other potential lien-holders or creditors aware by giving notice on what assets you have already pledged to use as collateral.
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Each state has different ways to search for UCC filings, but generally, they can be found on your state’s SOS website.
In most cases, a UCC filing will not have a direct impact on your business operations. If you do not have any additional borrowing needs and you do not default on your loan, then a UCC lien is not something you need to worry about. However, the risks associated with having a UCC filing against your assets should be considered before starting a loan application process.
A way UCC liens often use to affect small business owners is by holding them from getting additional financing before satisfying the existing lien. A UCC lien will prevent you from obtaining most types of traditional small business loans until the lien is paid off and could even hurt your chances of qualifying for alternative loans. For example, a bank will likely want all of your assets to be lien free to lend to you. If a business has an SBA 7a loan or SBA 7a Express loan through a traditional bank, it will likely have a blanket UCC lien filed against all assets.
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Getting a bank to carve out any of their security interests for another lender can be frustrating, and often it is not successful. An SBA borrower can find the long-term financing that they require to have, but lack the short-term working capital to bridge the business through their current situation.
(a) Ask your lender to carve-out specific assets from the blanket lien: You can try to get your lender to carve-out certain assets from their blanket lien so you can pledge it to another lender. This can be difficult and requires you to convince your lender that getting additional financing will help your business, and you will still be able to meet your payment obligations.
(b) Refinance your current loan: You can try to find a lender that will refinance your current loan and combine your balance with your additional financing needs into a single loan. This pays off your current lender and allows you to pledge your assets to the new lender. However, this is can be a big undertaking depending on how much debt you have outstanding and what your current loan terms are.
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(c) Find a lender willing to take a second lien position: You could also find a lender, such as OnDeck, that does not necessarily require a first position on collateral. These lenders will generally take a second position blanket lien on your assets, and instead focus on your business’s ability to make loan payments during the underwriting process.
The loan process can be time-consuming, and it can cost you money. You need to know before you start the process if there are any outstanding liens that could prevent your loan from being approved. That is why it is a good practice to check what UCC liens have been filed against you routinely. Because UCC liens are part of the public record, a best practice is to check for yourself if a lien has been removed before applying for a new loan.
All UCC liens for the past five years will be shown on your business credit report, which is a great place to identify any liens that should have been removed but are still outstanding. Your business credit report will typically contain several sections, with one of them devoted specifically to UCC filings.
While the presence of a UCC lien on your business credit report does not have an impact on your business credit score, lenders that check your credit will be aware of current and past UCC liens. The UCC liens they see will factor into possible lending decisions. After all, the UCC lien reflects borrowing.
That borrowing (the amount borrowed, your payment history, and so on) will have an impact on your credit score. However, a UCC lien by itself is not something that forces small businesses to think to take a business loan for bad credit.
When you are pledging business assets as collateral for a loan, then you are risking losing those assets at some point in the future if you default on the loan. If a UCC lien is filed against your business, then those assets are currently at risk until you pay your debts in full.
Keep in mind that while a UCC filing gives notice of a lender’s rights to your assets, they still must file a legal action against your business to benefit from their UCC claim on those assets.
The first step to legally removing a UCC lien is to successfully carry out the debt. The rules ad regulations for releasing a UCC lien once the debt is paid vary by state, but there are two main ways to remove them. The way is getting the lender to file a UCC-3 Financing Statement Amendment. Another way to remove a UCC lien is by swearing an oath of full payment at your State’s SOS Office.
Liens will still show up in a UCC search for up to five years after the removal, but the search will show that the lien has been satisfied. Although they will not be removed from the database, it will show that you met your obligations to the lender and they no longer have any rights to your assets.
If you’re wondering how to remove a UCC filing there are two ways:
You can request that your lender files a UCC-3 financing statement amendment. This will remove the UCC lien. Lenders are not necessary to file this, and most will not do this automatically. UCC liens expire automatically after five years (but can be renewed by the lender on long term loans). Since they automatically expire, most lenders do not bother filing releases unless a borrower requests they do so.
You can request the removal of a UCC lien with your final payment, or any time after you have paid off your loan. At the time the lender gets your release request, then they should initiate the process of filing the UCC-3 and give you confirmation of any filing. OnDeck, for example, will send you a copy of the paperwork they file with your state. Every release request must carry the original UCC-1 filing number, a reference to your full payment, and an official request to release the lien.
If you have an outstanding UCC lien on your record that you are struggling to remove, a good approach is to submit a letter to the lienholder. Using our free UCC Lien Removal Request Template makes the process easier and ensures that you communicate everything clearly to the UCC lien holder.
You can go down to your state’s SOS office and swear an oath that the debt has been paid in full. You can do this at any time, and the lien removes at the same as it would if your lender filed the UCC-3. Lying about these UCC liens can result in certain penalties that can include fines or jail time.
UCC liens appear not something you generally should be worried about. And more importantly, a potential drawback to having a UCC filing is not being able to get additional funding using your assets as collateral.
And at every time you enter into a financing agreement you should have an idea and be aware of UCC lien may be filed against your business’s assets. If your business currently has a UCC filing against it from a traditional long term lender, and you are struggling to find additional financing, then you should consider a loan with OnDeck.
OnDeck cares more about your business’s revenues than it does about collateral. It can fund up to $500,000 as quickly as one business day. Visit OnDeck today to see how much you qualify for.