Interested in expanding your business credit profile? Great! There’s so much that goes into that process, but an often overlooked aspect is your business’s history with UCC-1 filings.
You might have seen a reference to a UCC-1 filing on your business’s credit report, but if that previous sentence just launched you into financial confusion—don’t worry!
We’re here to lay out all you need to know about UCC filings and how it might affect your business—particularly when it comes to securing high-quality small business financing.
That would be the Uniform Commercial Code.
Let’s back up for a second: In the United States, states have the right to enact unique laws to govern their specific area that preempt uniform federal law. However, a variety of legal issues regularly transcend state lines—like sales and acquisitions—which makes a predictable and relatively uniform set of laws across states very desirable.
The UCC is known as one of these “Uniform Acts”—collaboratively written laws intended to facilitate the enactment of identical or similar laws by the separate states. First published in 1952, the 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. It’s a really huge list of laws! But the aspect of the UCC we’ll be discussing—and what your business really needs to know about—is Article 1: General Provisions, or a UCC-1 Filing.
A UCC-1 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. According to The Small Business Chronicle, “the security agreement may provide that the lender will acquire a lien on all of the equipment and inventory of the small business. In exchange, the small business will obtain a loan.” A lien means a lender has a right to keep possession of property belonging to another person until a debt owed by that person is discharged.
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.
For example, if you own a coffee shop and want to take out a loan to buy an espresso machine, the lender will file the UCC-1 form 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 lender technically still owns it until the debt is paid off.
The UCC-1 Financing Statement is filed in order to “perfect” 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, creating 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 filing are public record and often published in the local newspapers, giving notice of the lien.
The UCC-1 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.
In short, a lot of things. Mostly property or real estate or any other business assets. If you fail to pay your debt, a judgment creditor can usually grab cash from your bank account or force the sale of most business assets, according to Nolo.com. 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. In addition, most states exempt 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.
Obviously, not paying your debts will result in your assets being seized. But say you pay your bills diligently, even completely—UCC filings can still come back to haunt you due to the five-year active lien rule.
For example, once a debt obligation is paid in full, according to Nav.com, “a lot of times a lender will not terminate the lien automatically, this means that you could be closing up a financing arrangement [with another lender] and receive a delay or denial at the 11th hour, due to the results of your current lender’s public records search uncovering the existence of UCC-1 liens that are still active.” If not properly managed, UCC-1 liens could delay or flat out deny your ability to obtain higher quality forms of business financing.
In short, in order to continue expanding your business credit profile, you must continue to monitor the presence of UCC filings on your debt, current or not. “It’s a heart-breaking situation to be in,” says Nav.com, “where you are approved for the business loan that can fund the next big growth opportunity for your business, only to have it delayed or denied due to the active existence of old or inefficiently structured UCC-1 filings.”
In conclusion, it’s a good idea to keep up with the status of UCC-1 filings made against your business in order 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.