What is a UCC Filing (and How Does it Affect Your Business)
The financial agreements you enter into as a business owner are some of the most important decisions you’ll make. Most businesses borrow money or open lines of credit at some point during the life of their business and these are typically secured by a UCC filing.
Business owners should have a basic understanding of UCC filings and how they can affect their business and their attempts to obtain financing.
UCC rules govern commercial transactions in the U.S. These laws help lenders feel more confident about approving loans or leases for businesses.
UCC filings play a huge role in all of this. Let’s take a look a look at what a UCC filing is and how it affects your business.
What is a UCC Filing
A UCC filing is a part of a collection of laws that allow a lender to place a temporary claim on certain assets. When you borrow money for your business, the lender places a lien on your collateral and provides a loan of equivalent value.
Creditors file UCC forms to give notice of interest in a debtor’s business or personal property. In most cases, a UCC filing is required to obtain private financing.
There are many situations in which a UCC filing can occur. Some of these include:
- Small business loans
- Leasing vehicles or business equipment
- Borrowing from a venture capital company
- Selling goods or services
- Changing bank deposits into collection accounts
- Establishing business contracts
Depending on the situation, the UCC will vary. For example, if a business leases equipment, the UCC filing involves that particular collateral.
UCC filings can place a lien against one asset or all of a company’s assets. These filings may involve liens against assets such as bank deposits, accounts receivable, letters of credit, sales and leases, negotiable assets, and more.
UCC Lien Types
The two types of UCC liens include:
- Specific Collateral Liens- These liens involve a single asset as collateral.
- Blanket Liens- These liens cover or “blanket” various types of assets. They can be used to settle debts like any other form of collateral.
As a business owner, it’s important to understand the difference between specific collateral and blanket liens. You can have a lien against one asset or many assets from just one UCC lien filing.
These types of liens are further categorized into UCC-1 or UCC-3 filings. UCC-1 is the standard lien and stays that way unless there’s a change to the lien’s status.
It becomes a UCC-3 if there’s an amendment filed to the originally filed UCC-1. These changes include:
- An extension of the lien for 5 years or more
- Amending the lien, such as a change in address
- Termination of the original lien when the debt is paid in full
How a Lien May Affect My Business
A UCC filing creates a lien when tangible business assets are reserved as collateral. Once the lien is in place, you can’t dispose of the property until you completely pay off the debt.
Normally, a UCC filing has little to no effect on your business. But in some cases, it can have an impact.
Your Borrowing Power
A UCC filing can affect your ability to obtain other business loans. Since a lender already has a lien on some or all of your collateral, it might be difficult to secure funding from another unsecured lender.
Traditional lending institutions that offer loans and lines of credit want to be first in line with their lien position. They would rather not deal with any other outstanding debt preferences behind another lender.
A secured loan requires hard collateral. But an unsecured loan does not. You could apply for an unsecured business loan as a financing option.
It’s important to know if you have any UCC filings or if a previous lien has been lifted before applying for any type of business loan.
Your Business Credit
A UCC lien filing affects your business credit and stays on your credit report for 5 years. This doesn’t affect your credit score, it’s just visible on the report itself.
Although it’s not typical, a UCC lien might affect your ability to obtain a personal loan. It will however affect your ability to take out a business loan as all creditors prefer to be in first place with their UCC-1 filing.
You should understand what collateral you’re putting down when you apply for funding. In addition, you need to know if the lender is placing a UCC lien on your assets.
If so, you need to know whether it’s a specific collateral or blanket lien. It’s important to know what the lien covers and how long it will be there until it’s removed from your business’s credit report.
UCC Filing Issues
UCC filings are public records. This means any business can check to see if another business has UCC filings. For this reason, it’s difficult to not disclose this information from potential creditors.
Any UCC filings on your business will show up in background and credit checks on your business. A UCC filing isn’t necessarily bad, especially if your business is growing and doing well.
However, it may be hard to obtain additional business funding through traditional means, especially if a lender has a blanket lien on all of your collateral. This increases the risk for lenders and can stand in your way for obtaining the additional funding your business needs.
It’s critical that when you satisfy your debt, the lender releases the lien with a UCC-3 filing. This allows your business to freely pursue other sources of funding.
Applying for Financing which Require a UCC Filing
If you are thinking of taking on a loan that entails a UCC filing, speak to a financial expert before making any decisions. A UCC filing can be a positive scenario for your business.
It may be the best option you have to secure the funding you need to move your business forward. It’s important to be careful with UCC filings though. Before moving forward, keep two things in mind.
- Before applying for a loan, check to see if your business has any active UCC-1 filings.
- It’s the lender’s responsibility to terminate the UCC filing when you’ve paid off your loan. Be sure to request that they terminate the lien and file a UCC-3 form.
It’s always smart to keep up with any UCC-1 filings against your business. You want to be aware of anything that could affect securing the financing you may need now or in the future.
If you are trying to obtain financing for your business, we’re here to help. Contact us today.