What is a UCC-1 Filing and What Does It Mean For Your Business?

A UCC-1 filing is one of the most misunderstood business filings. This blog will help you understand what a UCC-1 filing is and why it’s important to every business. We’ll also cover the difference between specific and blanket liens, how they affect your business, and who should file one of these statements. Finally, we’ll give you tips on how to check for or remove UCC liens from your business’s assets upon settlement or payoff.

What is a UCC-1 filing?

A financing statement is a legal document filed with the state government that provides specific details of any loan or lease secured by assets of the business. In commercial transactions, a financing statement is required when taking out loans or leasing assets. This filing ensures protection against potential creditors and makes transactions easier to record and track.

A UCC-1 filing is used when financing personal assets, too. This statement includes the details of personal loans and personal asset purchases. A lender can use this statement to assess the credit-worthiness of a debtor before making a loan or providing finance for asset purchase. It’s important to understand the process of filing and maintaining a financing statement. Anything from the type of loan to the details of personal financing must be mentioned in the statement.

What does UCC stand for?

The Uniform Commercial Code (UCC) is a collection of laws that governs the United States. Commercial transactions are governed by business laws. The UCC is more of a model that individual states follow than it is a set of laws itself. The United States, the District of Columbia, Puerto Rico, and all 50 states are currently covered. The UCC rules are being used by the Virgin Islands, although they vary somewhat from state to state.

Before applying for a small business loan, we strongly recommend that you investigate whether your lender routinely files UCC-1 filings and requires collateral. We still recommend caution here — UCC-1 filings may have an impact on your business, as we discuss in further detail below.

The information on a UCC-1 filing can include:

  • The creditor’s name and address.
  • The debtor’s name and address.
  • A description of the collateral.

The two types UCC filings

Specific collateral liens

The collateral is secured with a loan or other financial obligation by virtue of the enforceable lien that is created. When a financier wants to secure their debt with specific assets, such as inventory, accounts receivable, or equipment, they may create collateral liens. Liens that apply to the debtor’s total assets rather than just specific items are more generic. In order for UCC-1 claims to be valid, they must be properly filed.

Blanket liens

A creditor may take a security interest in all of the borrower’s assets with this kind of lien. Loans guaranteed by the Small Business Administration (SBA) are frequently used for loans from banks and alternative lenders. Blanket liens, which are secured by many assets of the business are less risky and is preferred by most lenders. A blanket lien might carve out certain assets that would be free from the lien in particular circumstances. If the remaining assets are more than enough to pay the debt if a default occurs, this might happen.

How Will a UCC-1 Affect My Business?

If your debt is still active, the UCC lien will normally have a five-year duration before the lender must renew it. A UCC lien might have an impact on your company in one of three ways:

Prevents additional borrowing: 

Companies with an existing blanket lien are usually denied additional financing by lenders, who understand that there is already debt secured by the business. In the event that you default, they don’t want to be fighting over resources with other creditors. Borrowers might seek to carve out the blanket lien and release some of their secured property as collateral for more loans, although this is uncommon. Another option is to pay off the original lender and get a bigger secured loan from a second lender

Finding another lender to take a second-position lien is another option, most traditional banks will not consider this due to risks however alternative funders may. If you’re trying to get additional loans, having an active UCC-1 might make things tough but not impossible. It’s your responsibility as the borrower to make sure lenders terminate UCC-1 liens as soon as those loans are paid, so keep this in mind. Thankfully, it is simple to accomplish. You simply need to request that your lender file a UCC-3 termination statement with your most recent debt payment. The UCC-1 lien will be eliminated, allowing you to take on other loans.

Impacts business credit report: 

All UCC liens, including status, collections, and disputed amounts, will appear on your credit report over the last five years. Defaulting on a loan or it goes to collection will hurt your credit score, even if you have a UCC lien. If your credit utilization ratio rises too much as a result of a UCC lien, your credit score may suffer. The lien itself shouldn’t affect your score as long as you’re careful about the size of your loan and make responsible payments.

Risking pledged assets: 

If you miss payments on your loan, a UCC lien will jeopardize your company’s assets. The lender can sue for all of the company’s assets under a UCC blanket lien or repossess the specific collateral under contract.

How to check for or remove UCC liens

Ask the Lender to Terminate the Lien Upon Settlement or Payoff

A UCC-1 lien is attached to the borrower’s assets and gives the lender the right to seize those assets if the loan goes into default. If borrowers want to check for or remove existing UCC liens, they should ask the lender to terminate the lien upon settlement or payoff of their loan. Business owners can also search public records for UCC filings that have been made against them through their Secretary of State.

Visit Your Secretary of State’s Office.

When businesses borrow money or make purchases on credit, this statement is usually filed with the state’s Secretary of State’s office. In order for the interest to be effective, the UCC-1 must be filed with the state’s office. The lien will show up on a business’s credit report after the statement has been filed, and other creditors may see it. Business owners can look for existing UCC liens on the secretary of state website in their State, and if necessary, they may delete them. This procedure might include paying off the lien or other debts secured by it, as well as entering into fresh financing arrangements that eliminate or reduce the lien’s security interest.

The bottom line

A UCC-1 is filed as common practice by lenders to secure their interest on the business’s assets on the loans they provide. It’s a public statement notifying creditors of the existing debt obligation, so this could impact your business if you seek additional funding. Before applying to any new loans its a good practice to check your business public liens through your Secretary of State, you could have an old lien on a loan that was paid off still filed. If you are seeking additional funding behind a current lien, AMP Advance has multiple funding options that could suit your financing needs!

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