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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 lay out 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.
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The answer to “What is a UCC lien filing?” will rely on understanding what UCC stands for. The UCC in UCC filings 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 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, the UCC is really just a 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, 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. 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.
To be sure, most of the benefits of filing UCC-1 liens are benefits for 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 an 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 more while you’re still paying your equipment financing down. When you apply for financing, you won’t be able to offer up your espresso machine as collateral—any 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, at least until your repay your equipment financing in full.
The UCC-1 Financing Statement is filed in order 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, 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 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. 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. 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.
Jumping back to our New York coffee shop example, if you end up not being able to make your equipment financing payments, the laws of UCC filings in New York will take affect, and you’ll need to look into New York-specific bankruptcy exemptions to understand the full implications of a New York UCC filing.
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 lien filings 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. And figuring out how to find a UCC filing on your business property if easy, you’ll simply have to check your business credit history of keep tabs on UCC filing records through UCC filing searches.
“It’s a heartbreaking 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.”
Having made it through our guide to understanding UCC filings, you’re likely thinking about next steps. If you’re considering taking on secured debt that will entail a UCC filing, tread carefully. Of course, a UCC filing isn’t necessarily bad to have on your property—if it allows you to access more affordable funding, then a UCC lien is almost always worth it. That said, because they are so formal and legal, you should be very precise and careful with how you handle UCC filings.
Keep these two tenets in mind as you move forward:
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 through searching UCC lien public records.