Quick Overview
A UCC filing is a legal notice that a lender files with the state to establish a public security interest in a borrower's business assets. Most businesses that seek a loan or line of credit will encounter one, and while a UCC filing rarely affects day-to-day operations, it can limit your ability to use the same assets as collateral for future financing.
Tens of thousands of UCC filings are made every day across the country. UCC lien filing is a part of everyday business and is common in lending. However, a UCC filing can impact your ability to obtain business funding and assets, so it’s important to familiarize yourself with how the process works. We’ll go over the basics on this page.
What is the UCC?
UCC stands for Uniform Commercial Code. Sometimes referred to as “the backbone of American commerce,” this grouping of laws governs all commercial transactions in the United States, including the sale of goods, secured transactions, and negotiable instruments. The UCC gives businesses assurance that they can enter into contracts, and they’ll be enforced the same way throughout the country.
States adopted the UCC on an individual basis, so although the basic framework is the same across the country, some aspects are managed differently depending on the state.
What is a UCC Filing and UCC Lien?
A UCC filing or UCC lien is a legal form that creditors or lenders file with the Secretary of State in a business’s home state. It’s typically done when the business secures a loan or line of credit.
For the creditor, UCC-1 filings create a public record that it has a security interest in the business or personal property of a borrower. It essentially tells all other lenders and creditors that the secured party involved in the UCC-1 lien gets first dibs on certain assets if the business defaults on a loan or files for bankruptcy.
For the business owner, UCC-1 financing statements are more of a means to an end. They give the lender more confidence, so the business can qualify for funding.
Types of UCCs
There are two main types of UCC liens: specific collateral liens and blanket liens.
Specific Collateral Lien
As the name implies, a specific collateral lien refers to a lien on an item mentioned by name in a UCC filing. Assets that can serve as collateral for a lien include:
- Inventory
- Receivables
- Equipment
- Letters of Credit
- Real Estate
- Vehicles
- And More
For example, let’s say you run a trucking company and you apply for equipment financing to cover the cost of a new trailer. The trailer will serve as collateral while you pay off the loan. The funding company will make a UCC filing that indicates they have an interest in the trailer.
If you default on the loan for the trailer, the lender may be able to take possession of the trailer and possibly sell it.
Blanket Lien
On the other hand, a blanket lien relates to filing a lien on a group of business assets or all a business’s assets. A lender would understandably prefer a blanket lien when the value of the loan is greater than the value of a single asset. In the event of a default, a blanket UCC filing agreement gives the lender the right to seize any pledged assets owned by the debtor (your business).
How Long is a UCC Filing Active?
UCCs are active for five years after filing, though creditors can refile repeatedly until the debt is satisfied. When you pay off the debt, the filing entity should file a UCC-3 financing statement amendment. UCC-3s simply indicate that the conditions of the UCC-1 have been satisfied.
Sometimes, creditors fail to remove a UCC lien after the debt is satisfied. In these cases, the business owner can submit a letter to the lienholder and request removal. Business owners can also swear an oath of full payment with the Secretary of State’s office, and the state will remove the lien. It’s worth noting, however, that each state has its own penalties for lying about a payoff. So, to avoid potential fines or jail time, always be sure the debt is satisfied beforehand.
Who Uses UCC Filings?
Anytime an entity is considering extending a business credit, the entity will usually check to see if any UCC filings already exist for the business and asset in question.
A lender does not usually make actual filings until the business accepts the terms offered, though some include language that gives the lender permission to file during the application process.
How Does a UCC Lien Affect Your Business?
A UCC lien won’t typically impact the daily operations of a business, but it can under certain circumstances.
Business Credit
You’ll see UCC-1s and removals of liens on your business credit report, as will anyone who pulls your credit report.
If you have an active UCC-1 already and you’re trying to obtain more credit while using the same asset as collateral, the lender has two options. It can take second place, meaning the first lender gets paid first if the asset is liquidated, and the second lender will be paid with any remaining funds, or it can deny the application. Most lenders will deny the application because taking the second position is risky, and the likelihood of receiving full payment in the event of default or bankruptcy is much lower.
Assets
Any assets you’ve pledged to a lender can be seized to satisfy your debt if you default or file for bankruptcy.
Do I Need a UCC Filing?
If you’re applying for any kind of business credit, chances are a UCC filing will be required. However, it isn’t likely to impact your business unless you try to get additional credit later while pledging the same asset or you default on your agreement.
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Frequently Asked Questions About UCC Filings
What does a UCC lien mean?
A UCC lien is a legal claim a creditor places on a borrower’s business assets to secure repayment of a debt. It is created through a UCC-1 filing with the Secretary of State and serves as a public record that the creditor has a priority interest in those assets. If the borrower defaults, the lienholder has the right to seize the pledged assets.
What is the definition of a UCC filing?
A UCC filing, formally called a UCC-1 financing statement, is a document that a lender files with the state to declare a legal interest in a borrower’s collateral. It is a standard part of most business lending transactions and does not indicate a borrower is in financial trouble. The filing becomes part of the public record for the duration of the loan.
Is a UCC filing the same as a lien?
A UCC filing and a UCC lien refer to the same arrangement but from different perspectives. The filing is the legal document submitted to the state, while the lien is the security interest that document creates. When a lender files a UCC-1, the result is a UCC lien on the specified collateral until the debt is repaid and a UCC-3 termination is filed.
What does a UCC filing mean for a borrower?
For a borrower, a UCC filing means that a lender has established a priority claim on one or more of your business assets as a condition of extending credit. It does not restrict your ability to operate, but it does appear on your business credit report and may limit your options if you seek additional financing using the same collateral.
How does a blanket UCC lien affect future financing?
A blanket UCC lien gives a lender a security interest in all of a business’s assets rather than a single item. This can make it harder to qualify for additional financing because subsequent lenders are placed in a lower priority position if the business defaults. Some lenders will decline to extend credit when a blanket lien from another creditor is already on file.
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