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In the US, Uniform Commercial Code (UCC) is a set of laws that govern business transactions. A UCC filing is used to create a security interest in collateral such as property or an item you are selling on credit. If someone defaulted on their loan and stopped paying, they had all rights to seize any assets pledged under the agreement through this lien process.
A UCC filing allows creditors a claim on assets pledged as security by a debtor. The phrase comes from the Uniform Commercial Code (UCC), which is a system of regulations that governs business transactions.
When Does a UCC Filing Take Place?
The lender may file a UCC lien on any assets pledged to cover the loan or factoring contract when a firm joins a financing arrangement secured by collateral, such as invoices. A UCC lien seldom affects a company’s day-to-day operations, but it might hinder it from selling assets or obtaining new capital.
A UCC lien is a common aspect of small company funding. While other forms of liens are filed in the event of a negative event, such as nonpayment of taxes, a UCC lien is a common part of small business financing. The lien informs all possible creditors that the borrower owes the lender money and that the lender has a security interest in the borrower’s business assets until the loan is repaid.
What is a UCC Lien and How Does It Work?
When a borrower signs a security agreement to pledge assets to a lender in exchange for a loan or business line of credit, a UCC filing is begun. The lender has the right to utilize particular assets as collateral under a security arrangement. When a borrower enters a security agreement, it is common for a lender to register a UCC lien on the assets pledged by the firm to notify other possible lenders of its rights.
UCC liens may be filed by lenders against companies or people. They operate on a first-come, first-served basis, which means that if a default occurs, the first lender to register a UCC lien will have priority over the asset. The lender is retaining their right to collect on the assets pledged to them by a company.
Let’s assume Bank A registers a UCC lien on equipment, and subsequently, Bank B files a lien on the same equipment. The equipment will be given to Bank A initially. Bank A will be reimbursed first if the firm goes into default and sells the asset to pay off obligations. After the revenues are utilized to repay Bank A, Bank B will get money.
Lenders may place a UCC lien on a variety of assets, including:
- Instruments for sale
- Inventory
- Securities for investment
- Large-scale operational machinery
- Certificates of credit
- Equipment for the workplace
- Real estate
- Receivables
- Vehicles
UCC liens ban firms from taking out several loans with the same assets as security. Prior to these warnings, a company owner might get several loans secured by the same piece of agricultural equipment since the lenders were unaware of each other’s existence. Anyone may now do a public UCC search to see what assets are available as loan collateral.
UCC Liens: Common Types
When a company owes the lender money and the lender wishes to reserve a space in line for the assets the firm commits, the lender files a UCC lien. A particular collateral lien and a blanket lien are the two most typical forms of UCC filings. A particular collateral lien grants the lender ownership of a specific corporate asset, such as machinery. A blanket lien gives the lender control over all of the company’s assets.
Liens Against Specific Collateral Under the Uniform Commercial Code
When a creditor acquires an interest in one or more assets but not all corporate assets, he or she files a UCC filing against particular collateral. In this situation, the borrower is securing a loan or credit arrangement by pledging specified assets as collateral. For loans with a defined purpose, such as equipment or inventory finance, specific collateral liens are most typical.
For example, if a company finances a semi-truck, the lender is likely to file a UCC lien and name the vehicle as collateral. Borrowers, on the other hand, would not be required to put up any assets in addition to the funded vehicle.
Blanket Liens at the UCC
When a creditor has an interest in all of a company’s assets, this is known as a UCC blanket lien. When a lender files a blanket lien on all assets, getting new finance for the firm becomes in default until the claim is fulfilled or the lender eliminates it.
Most company loans need a blanket lien, with the exception of equipment finance, which is secured by the equipment. This enables lenders to issue a wide lien that covers all of the company’s assets.
What Is a UCC Lien and How Do I Check It?
There’s no need to fear if you’re confused if you have an outstanding UCC filing on your possessions. The state’s public UCC lien filing database keeps track of all UCC filing statements. Business owners may use their company information to search the database and see the name of the lienholder as well as a complete description of the lien.
Take a look at your UCC-1 Financing Statement.
Lenders must submit a UCC financing statement with the secretary of state in the state where the borrower’s company was formed. Creditors submit this to “perfect” or “validate” a UCC claim. The lien, the lienholder’s identity, and the debtor’s identity are all described in the UCC-1 financing statement.
All UCC lien filings are public documents that notify other possible lienholders or creditors that the assets pledged as collateral have been encumbered. This protects the lender’s collateral and guarantees that borrowers cannot use the same asset to obtain several loans.
UCC Lien Database Searchable by State
Although each state has its own method of searching for UCC filings, borrowers may discover them on the website of their local secretary of state. Most jurisdictions enable business owners to look for debtors using their company or individual identities. However, the functionality might be limited at times.
How a UCC Filing Affects a Company
A UCC filing will, in most situations, have no direct influence on company activities. A UCC lien is not something that company owners need to be concerned about if they do not have any extra borrowing requirements and do not fail on a loan. However, before beginning the loan application process, company owners should evaluate the hazards of having a UCC filing against assets.
Additional Borrowing May Be Prevented by UCC Liens
Small company owners are most often harmed by UCC liens because they hinder them from obtaining new funding until the present claim is satisfied. A UCC lien will restrict borrowers from obtaining most forms of conventional business loans until the lien is paid off, and it may even make it difficult for a company to qualify for online business loans.
Before approving a loan, a bank, for example, will want all of the assets to be lien-free. A blanket UCC lien will be issued against all assets if a firm has an SBA 7(a) loan or SBA 7(a) Express loan from a conventional bank.
There are three ways to secure finance with an existing UCC filing:
- Borrowers might attempt to convince a lender to carve out specified assets from the blanket lien so that they can pledge such assets to another lender. This may be tough, as borrowers must persuade lenders that more funding would benefit the company.
- Borrowers might attempt to locate a lender that can refinance their present loan and combine the amount with the extra financing requirements into a single loan. The present lender is paid off, and the borrowers are able to pledge assets to the new lender.
- Find a lender who will accept a second lien position on collateral: Business owners may be able to find a lender who will not need a first lien position on collateral. During the underwriting process, these lenders might take a second-place blanket lien on assets and concentrate on the business’s capacity to make loan payments.
The loan application procedure may be time-consuming and costly. Before beginning the procedure, borrowers should find out whether there are any existing liens that might prohibit a lender from granting the loan. That is why, before applying for a loan, it is a good idea to check to determine whether you have any existing UCC liens.
UCC Liens May Have an Impact on a Company’s Credit Report
A company credit report will reveal all UCC liens filed in the last five years, which is a great location to look for any liens that lenders haven’t removed. The business credit report will be divided into many categories, one of which will be dedicated to UCC filings.
UCC filings are included in this sample company credit report.
While a UCC lien on a business credit report has no effect on the credit score of the firm, lenders that examine business credit will identify current and previous UCC liens. The amount borrowed, payment history, and other criteria will all influence the lender’s choice.
Pledged Assets are at Risk for Business Owners
Taking out a loan entails some risk. When a company pledges assets as collateral for a loan, it runs the risk of losing those assets if the loan is defaulted on. If a lender files a UCC lien against a company, that company’s assets are at risk until the loan is paid off. While the UCC filing notifies a lender of their rights, the lender must take legal action in order to profit from the UCC claim.
How to Get Rid of a UCC Lien
Paying down the obligation is the first step in lawfully eliminating a UCC lien. The regulations for releasing a UCC lien after a borrower has paid off the obligation vary by state, but there are two major methods to do it. The lender may do this by filing a UCC-3 Financing Statement Amendment. A UCC lien may also be removed by taking an oath of full payment at the secretary of state’s office.
Liens will appear in a UCC search for up to five years after they have been removed by the lender, although the search will state that the UCC lien has been satisfied. It will not be erased from the database, but it will reflect that borrowers have fulfilled their commitments to the lender and that the lender no longer has any rights to company assets.
A UCC-3 is filed by a lender.
Borrowers can request that a UCC-3 be filed by a lender. This will remove the UCC lien. States do not require lenders to file, and most won’t do it automatically. UCC liens expire automatically after five years, but a lender can renew them on long-term loans. Because they expire automatically, most lenders do not bother filing releases unless a borrower requests they do so.
Borrowers who are having trouble getting a UCC lien removed from their record might write a letter to the lienholder.
Example of a UCC-3 Financing Statement Amendment.
Make a full payment oath.
Owners of businesses may go to their secretary of state’s office and declare that the debt has been paid in full. When a borrower does this, the state removes the lien, much like when a lender files a UCC-3. If you lie about UCC liens, you might face penalties such as fines or prison time.
Frequently Asked Questions about UCC Liens (FAQs)
Are UCC filings open to the public?
Individuals may search the secretary of state’s UCC database for UCC filings since they are part of the public record. Individuals may search the database for financing statements, security instruments, federal tax liens, and other forms of lien filings by company name or employment identification number after a UCC filing is filed (EIN).
What is the best place to register a UCC?
A UCC-1 file may be made at the secretary of state’s office by a lender. The office where the company is incorporated must be utilized.
What is the best way to locate my UCC filings?
Business owners may look for the secretary of state where their company is incorporated to locate a UCC filing. Some states provide an online search tool that utilizes the business’s EIN or the debtor’s name. The database sometimes limits company owners to searching by file numbers.
Is it possible to submit a UCC-1 without signing a security agreement?
Without a security agreement with the borrower, lenders are unable to file a UCC-1. Only if the debtor authorizes the filing in an authenticated document or by authenticating a security arrangement may a lender submit an initial statement. It’s essential to get legal advice if a lender files a UCC-1 without the borrower’s consent.
When a UCC file expires, what happens?
After five years, a UCC-1 financing statement expires. On long-term loans, lenders may extend the file for another five years. When a UCC file expires, the state deems it to have expired and, after five years, destroys the record. Lenders may sometimes show that the debt is still ongoing and the UCC filing can be reinstated.
Conclusion
Business owners shouldn’t be concerned about UCC liens since the sole disadvantage is that they won’t be able to get further financing using the same assets as security. When a business owner enters into a financing arrangement, lenders may file a UCC lien on the assets of the company.
Frequently Asked Questions
What does UCC filing mean?
A: UCC stands for Uniform Commercial Code. It is a code that governs commercial transactions, including bank and debt finance.
What is the difference between a lien and a UCC filing?
A: A UCC filing is a Uniform Commercial Code. This describes the process of recording property ownership in an official system. Lien means to file paperwork with the government which gives you right over something that belongs to someone else.
