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 allow a lender to formally lay claim to collateral that a debtor pledges to secure their financing. The term is a part of a collection of rules established to regulate how commercial transactions work under the Uniform Commercial Code (UCC).
If you’re a small business owner interested in expanding your business credit profile, it’s difficult to know what next steps you can take beyond the basics. Beyond responsibly taking on and repaying business credit, what can a business owner do to improve their business’s credit history?
There are so many potential tactics for improving your business credit, but an often-overlooked one is digging into your business’s UCC filings.
You might have seen a reference to a UCC-1 filing—also referred to as a UCC filing or a UCC lien—on your business’s credit report.
We’re here to explain all you need to know about UCC filings—from a boiled-down answer to “what is a UCC filing,” to all the nitty-gritty details behind an in-depth UCC filing definition. We’ll also explain how a UCC filing might affect your business—particularly when it comes to securing high-quality small business loans.
The UCC in UCC filing stands for Uniform Commercial Code, but that doesn’t necessarily tell you much on its own.
Let’s back up for a second: States have the right to enact unique laws to govern their specific areas that preempt uniform federal law. However, a variety of legal issues regularly transcend state lines—like sales and acquisitions—which necessitates a predictable and relatively uniform set of laws across states.
The UCC is known as one of these “Uniform Acts”—collaboratively written laws meant to help enact identical or similar laws by the separate states. First published in 1952, the UCC is one of several acts that have been put into law to harmonize the law of sales and other commercial transactions across the United States.
Essentially, the UCC is just a huge list of laws. But the aspect of the UCC we’ll be discussing—and what your business needs to know about—is Article 1: General Provisions, which dictates UCC-1 Filings, more commonly referred to as UCC filings.
A UCC filing refers to the UCC-1 Financing Statement, which is a legal form that a creditor files to give notice that it has or might have an interest in the personal or business property of a debtor. The lender will acquire a lien on the equipment and inventory of the small business, which serves as collateral until the debt owed by that person is discharged.
Essentially, a lien means a lender has a right to keep possession of property belonging to another person until the loan is repaid.
As you can see, most benefits surrounding filing UCC-1 liens apply to lenders. The lien protects the interests of the lender in the case of borrower default or bankruptcy, in which case those business assets would be foreclosed on, seized, or sold off to pay back the lender.
To illustrate, let’s say you own a coffee shop in New York and want to take out a loan to buy a newer, faster espresso machine to keep up with demand. If you secure equipment financing, the lender will file a UCC lien to state that if the debt for the espresso machine is not repaid, the lender has the right to repossess the espresso machine or seize other assets from your business. While you’re still paying off the espresso machine, the machine itself will serve as collateral for its financing, and it will have a UCC filing on it until you repay your equipment financing debt in full.
So, let’s say, for instance, that you want to access additional financing while you’re still paying your equipment financing down. When you apply for new financing, you won’t be able to offer up your espresso machine as collateral. Potential lenders you apply to will perform a New York UCC search and see that your equipment financing lender has already laid claim to it until you repay your equipment financing in full.
The UCC-1 Financing Statement is filed to protect a lender’s or creditor’s security interest by giving public notice that there is a right to take possession of and sell certain assets for repayment of a specific debt with a certain debtor. This kind of security agreement might be a prerequisite for a lender to loan money to your business, and establishes the terms of the lien that the lender will acquire on the property of the debtor in the case of default or bankruptcy.
When you are approved for secured financing, the lender or creditor files a UCC-1 Financing Statement with the secretary of state in your business’s home state. This filing creates a lien against particular assets—unless the lender files a blanket lien naming all assets—that are being used by the borrower to secure the financing.
The financing statement provided to the secretary of state only needs to contain three pieces of information:
The notices of the UCC lien filing are public record and often published in the local newspapers, giving notice of the lien.
The UCC filing is active for five years, which means that a lender needs to renew the filing to keep interests protected for loan terms extending longer than five years. Amendments to the UCC-1 might also be filed to update secured asset listings.
Lenders can place UCC filings on a lot of things. Generally speaking, lenders will mostly file UCC liens on property or real estate or any other business assets. If you fail to pay your debt, a judgment creditor can usually seize cash from your bank account or force the sale of most business assets.
However, “a judgment creditor can’t take personal property that is legally exempt from creditors,” says Nolo.com. Most states exempt a certain amount of your personal assets, such as food, furniture, and clothing, from being taken by creditors or lenders. Also, most states exempt the following from creditors:
Most states also let you keep a couple of thousand dollars’ worth of business equipment and tools of the trade, as well as money in tax-deferred retirement plans. Because UCC filing rules will vary from state-to-state, it’s prudent to check in your state’s bankruptcy exemptions to understand what UCC filing rules will apply to your secured debt.
Returning to our New York coffee shop example, if you’re unable to make your equipment financing payments, the laws of UCC filings in New York will take effect. You will then need to look into New York-specific bankruptcy exemptions to understand the full implications of a New York UCC filing.
You may be wondering: Is a UCC filing bad? A UCC filing isn’t necessarily harmful to have on your property—if it allows you to access more affordable funding, then a UCC lien is almost always worth it. Simply having a UCC filing also won’t impact your credit score. However, the presence of a UCC filing will appear on your credit report and can affect your chances of qualifying for other forms of financing in the future.
To explain, let’s say you received funding from Lender A and are now applying for a separate form of financing from Lender B. When Lender B performs a credit pull, they’ll see that Lender A filed a UCC lien against your assets. For many lenders, this will be a dealbreaker because it means they would have to take the “second position.”
In other words, if you default on your debts, Lender A would have first dibs on your assets to recoup their losses, and Lender B would only be able to try to recoup their losses once Lender A was satisfied. This poses a greater risk to Lender B, which may cause them to deny your loan application.
Even once a debt obligation is paid in full, lenders will not always cancel the lien in a timely fashion. If not properly managed, UCC lien filings could delay or flat out deny your ability to obtain higher quality forms of business financing. This is why it’s essential to monitor your credit report and remove UCC liens, if necessary.
Even if you repay your debts on time and in full, your lender may forget to remove the UCC lien filed against your assets. While this won’t affect your day-to-day operations, it can pose a problem when you apply for any other funding down the road.
Luckily, figuring out how to find a UCC filing on your business property is easy—you’ll have to check your business credit history and keep tabs on UCC filing records through UCC filing searches. If you notice any outdated UCC filings that are still assigned to your business, you’ll want to have them removed.
It’s up to the lender to file a UCC termination statement once your loan is paid in full. After a secured debt obligation is paid off, you should immediately request that the lender terminate the lien on said assets through the filing of a UCC-3 termination form.
If your UCC filing remains after filing the UCC termination form, you may also be able to appeal to your secretary of state’s office to have it removed. Finally, you might be able to dispute the inaccuracy through the credit reporting bureaus directly—keep in mind, however, you will need to do this with each reporting agency individually.
There are two simple methods for finding UCC filings. The first method is to refer to your business credit history. The second method is to search for your business name on your secretary of state’s online database. As UCC filings are public records, it should be easy to find details about the lender(s) and claims to your business assets.
A UCC filing is generally active for five years. After that time period, the lender must renew the filing to retain the rights to your assets. Most lenders will allow the lien to expire on its own, but if you want to remove a lien before that, you must file a UCC-3 financing statement.
The purpose of a UCC financing statement (Form UCC-1) is for creditors to notify debtors that they have a security interest in their personal or business assets. These assets serve as collateral should a debtor default on a loan or file for bankruptcy.
A UCC filing fee is the fee incurred when a party files Form UCC-1. The fee will vary by state. For example, a starting fee of $10 applies to California filers, while a starting fee of $20 applies to New York filers.
Having made it through our guide to understanding UCC filings, you’re likely thinking about the next steps. If you’re considering taking on secured debt that will entail a UCC filing, tread carefully.
While a UCC filing is often a necessary step in obtaining the right financing for your business, make sure you fully understand the terms of your loan agreement and how they may impact you in the future. Once you’ve repaid your debts, make sure the lien is removed in a timely fashion, so your business credit is up to date.
It’s a good idea to keep up with the status of UCC-1 filings made against your business to make sure you can get the quality financing you need when you need it. You can always check the status of UCC filings against your business through your business credit report or searching UCC lien public records.
Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera.
Meredith launched the Fundera Ledger in 2014. She has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending and financial management.