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If you plan on using secured loans, it’s essential to understand the meaning of a uniform commercial code (UCC) filing. This type of filing plays an integral role in securing collateral for loans and other purposes in a commercial setting. Many lenders will allow you to use assets as collateral to secure funding. If you fail to pay back your loan, the lender can seize your assets to meet the financial obligations of your loan.
In this article, we look at UCC filings, why they’re important, their impact on your business, and other related topics. Let’s dive in and take a closer look!
What Is a UCC Filing?
A UCC filing indicates that a borrower’s asset is being used as a form of collateral for a loan. The lender registers a UCC filing to ensure it has the legal recourse to an asset (or multiple assets) in the case that a borrower isn’t able to pay back the lender. A UCC filing is used within commercial settings when securing a loan against an asset.
Below are common forms of collateral for small business owners:
- Real estate
- Office equipment
When and Why Is a UCC Filing Used?
A UCC filing typically occurs when a borrower offers collateral to a lender in exchange for financing. In order for the lender to be sure that they will have access to the collateral in the case of a default, they file a UCC lien against the asset. In many cases, a UCC filing is designated for non-titled assets. This means vehicles and other titled equipment may have a different type of lien filed against them.
When getting a loan, a UCC filing is essential because it provides collateral to lenders. If UCC filings did not exist, borrowers could theoretically use the same asset as collateral for multiple loans. In the case of a loan default, this could result in various creditors pursuing the same asset.
Fortunately, it’s easy to see what assets have UCC filings via a public UCC database managed by the National Association of Secretaries of State.
The Two Types of UCC Filings
Whether you’re a borrower or a lender, it’s critical to understand the distinctions between the two types of UCC filings. Let’s explore each type in more detail below:
1. UCC lien against a specific collateral
A UCC lien against specific collateral is a UCC filing that specifies the asset used for the loan. However, you can also use this type of filing for several assets. For example, if a bank lends you $10,000 and the cost of a single piece of operational equipment doesn’t cover the loan’s value, then a lender can file the UCC lien against multiple assets.
2. Blanket UCC filing
If a lender wants additional security, or if a loan is too large for a single asset, there is also the option for a blanket UCC filing. This type of filing covers a business’s assets in their entirety. However, this type of UCC lien can make borrowing money challenging for small businesses. When a UCC lien is against a specific asset, then a business owner can use other assets to borrow additional capital. On the other hand, with a blanket UCC filing, business owners may have to wait for the current UCC lien’s removal before borrowing more money. Lenders will not want collateral already secured by another lender.
What Are the Effects of a UCC Filing?
Let’s take a look at the different effects a UCC filing can have on your company:
Impacts business credit
A UCC filing should not have a direct impact on your business credit score unless you miss payments or default on your loan. However, your UCC filings for the past five years appear on your business credit file, meaning a lender can view these details if they wish to explore your current and previous secured loan arrangements.
Not only is this helpful for lenders who want to check on the financial health of your business, but it’s also useful for you to check the current UCC liens on your assets. For example, suppose a lender doesn’t remove a lien from your asset. In that case, you will need to remedy the situation by contacting them directly. Checking your credit file routinely can help you confirm you have no incorrect UCC filings.
Prevents using collateral for another loan
One of the most critical impacts of a UCC filing is its ability to prevent further lending against a specific asset. This means that you will have fewer assets to secure against future loans until you pay off your existing UCC liens. The purpose of a UCC lien is to ensure lenders don’t have conflicting parties trying to claim the same asset if loans are not repaid. This also means that you must be strategic about which assets you use for collateral. For example, using a large asset for a small loan will prevent you from using it for a larger loan at a later date, unless you pay off the existing loan first.
While most liens will result in a full restriction of all your assets, you may find a lender that is willing to remove some assets from a blanket lien. Also, you may find a lender that will secure itself against the same asset as another lender, but they will have to accept being in the second position for any potential payout. Lastly, you can often refinance a loan to change the collateral. This makes it easier to move your secured assets around for future borrowing.
Any business owner knows that taking out a loan is a risk. Not only do you have to worry about interest rates and repayments, but you also have to put up collateral in case you can’t repay the loan. However, what many business owners don’t realize is that using critical assets as collateral can be even riskier.
If you can’t meet your loan obligations, not only will you lose the asset, but you may also stop your business from operating. For example, if you use your company’s vehicles to secure a loan and then default on the loan, you may not only lose the vehicles, but you may also lose the ability to make deliveries or transport goods. As a result, it’s important to recognize the risks involved in using critical assets as collateral and make sure that you can afford the loan before you sign.
Why Should a UCC-1 Financing Statement Be Filed?
In order for a UCC lien to be valid, a lender must file a UCC-1 financing statement in the state where the borrower’s business is registered. Not doing so means that there is no official record of the lien. This is required if a lender wants to ensure that future lenders will not be able to secure loans against the same loan. This type of filing statement will include information about the lender, the secured asset, and the borrower. This is a public record, which allows other lenders and stakeholders to check if assets currently have UCC liens filed against them.
How do you file a UCC-1 financing statement?
Filing a UCC-1 financing statement is simple, but the process varies depending on your state. You need to file the form in the state where the borrower’s business is registered.
Head to the secretary of state website for the relevant state and search for the UCC-1 form. Here you can print off a paper form and send it to your secretary of state. Alternatively, most states allow for digital filing, which is quicker and often cheaper.
A UCC-1 form requires the following details (and more):
- Borrower’s name
- Borrower’s organization
- Borrower’s mailing address
- Secured party’s name
- Secured party organization’s name
- Secured party’s mailing address
- Details about the collateral
- The type of transaction
Make sure to fill in the form correctly to avoid any future issues with the UCC lien. Contact the secretary of state if there is any confusion about your filing.
How much does it cost to file UCC financing statements?
The cost of filing will depend on the state where the borrower registers its business.
While some UCC filing fees are as little as $7, others can be a bit higher. For example, New York requires $20 for electronic filing and $40 for paper filing.
Below, let’s take a look at the costs of filing UCC financing statements in a few other states:
- Texas: $15 for up two pages; $30 for longer applications
- California: $5 for online; $10 for up to two pages; $20 for longer applications
- Montana: $7 for filing
- Maine: $15 for up to two pages; $30 for longer applications
- Florida: $35 – $45 for filing
- Arizona: $9 for filing
Make sure to explore the costs relevant to your state before you submit an application!
How to Remove a UCC Filing Lien
You’ll have to remove a UCC filing lien if you want the details recorded on your credit file or if you want to borrow against the same asset again in the future.
The easiest way to remove a UCC filing lien is to pay your loan off. Once you successfully pay back your loan, your lender needs to file a UCC-3 financing statement, which will result in the removal of the lien. Most professional lenders will do this automatically, but make sure to clarify with your lender that they will take this step once you make the final payment on your loan.
There are instances in which borrowers run into difficulty removing liens. Suppose your lender is being non-responsive or refusing to remove your UCC lien despite your payment of the total loan balance. In that case, you do have another option available.
As a borrower, you can swear an oath of full payment to your secretary of state. This will result in the removal of the lien. However, lying about making a full payment can result in fines, jail time, and other repercussions. Don’t pursue this option unless you are certain you paid your loan in full.
UCC Filings: Final Thoughts
Now that you understand the core details of UCC liens and how they impact your business, it’s time to approach your future business funding loans strategically. Make sure to routinely check your business credit file for UCC lien details and always double-check that liens from paid-off loans are no longer recorded.
UCC Filings FAQs
Check out some of the common UCC filing questions and their answers below:
How do I know if I have a UCC filing?
UCC filings are public records, which means you can check your UCC liens at any time. Your business credit file should list all UCC filings from the past five years. Additionally, you can use the National Association of Secretaries of State UCC filing database to check your liens.
Will a UCC lien show up on my personal credit?
No. This is a type of filing that only appears on your business credit file. Don’t worry about a UCC lien impacting your personal credit score.
How do I manage a UCC portfolio?
UCC portfolio management is primarily relevant for lenders. This is a complex process that requires expertise. In many cases, lenders will hire lawyers to help with UCC portfolios. As many lenders have millions of dollars worth of UCC liens filed, proper management is essential.
Is there a way to get rid of a UCC lien filing?
The only way to remove a UCC lien filing is to pay the loan in full. A lender should automatically remove the filing after you make your final payment on your loan.
If your lender fails to remove a lien for a loan you already paid, hope is not lost. You can contact your secretary of state and swear an oath of full payment. While this will remove the lien, you can face legal repercussions, including jail time, if you swear this oath without paying the full balance of the loan.
How long will a UCC lien stay on a business credit report?
UCC liens remain on credit files for five years. This allows you and lenders to explore the details of existing liens, but it won’t impact your business credit score. However, it’s critical to check that liens from fully paid loans are recorded otherwise, they may impact your ability to borrow in the future!
Is there a difference between a UCC and a lien?
A UCC filing results in a lien against an asset. However, there are other types of liens also relevant to business owners. For example, a lender will often file a lien against a vehicle when you purchase it on finance. This is not typically a UCC lien.
Is a UCC filing serious?
A UCC filing is a routine element of secured loans. Many lenders use these types of liens to ensure that collateral does not have multiple loans attached to it. You should take UCC filing seriously because failing to repay a secured loan can result in the repossession of the collateral.
When do UCC liens expire?
UCC liens expire after five years. However, for those engaged in long-term loans, the UCC lien can be renewed after its expiry date to ensure that the loan is still secured by the relevant asset.
Is there a UCC filing fee?
Unfortunately, it’s not free to file a UCC lien. A bird’s eye view of the cost is not possible because each state has its own fees. However, many states have fees as low as $7, which means this is not an expensive process when you consider the value of most UCC liens.
What is a UCC filing on personal property?
While UCC filings are useful for businesses that are borrowing, you can also use your personal property for a UCC lien. This means that a lender will secure the loan against a personal asset.
Again, you must be careful when accepting this type of loan arrangement. It means that your lender will have rights over your personal asset if you don’t meet loan obligations.
How long are UCC filings good for?
A UCC filing runs for five years or until the loan is fully paid (whichever is shorter). However, if a loan term is longer than five years, a lender can refile the UCC lien for five years after it expires.
Can a UCC be filed against a company?
Yes. While many liens are filed against specific assets, a lender can also file a blanket UCC lien that covers all the business’s assets.