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UCC Filing: What It Is & What You Need to Know

When a business secures a loan, the bank or lending institution will file a UCC filing to protect its interests, laying claim to an asset or assets pledged as collateral, as first in line to secure it in the event that the business defaults on the loan.

A frightening prospect indeed, but necessary for a business to hold some level of trust in the agreement.

Have you received financing in the form of a small business loan and paid it off in full? If so, checking to make sure that no UCC lien exists on your public record is a good way to make sure that your record has no lingering transactions to deter requests for additional lending in the future.

Understanding UCC filings and the ways in which it affects your business is paramount. For example, when should Form UCC-1 be filed? Or Form UCC-3 or 5?

Keep reading to learn more about UCC filings and how they can impact your business.

What is a UCC filing?

Types of UCC Filing Statements:

  • UCC-1 New Filing
  • UCC-3 Termination
  • UCC-3 Continuation
  • UCC-3 Amendment
  • UCC-5 Information Statement

What is a UCC lien?

A UCC filing, also called a UCC lien, is a standard component of small business lending. In a UCC filing, a creditor will claim the rights to an asset or assets of a borrower until the business or individual repays the loan.

UCC stands for the Uniform Commercial Code, which is a set of uniform regulations that simplify doing business from state-to-state.

Having a lien filed against collateral doesn’t affect a debtor’s credit score. It will be listed on a debtor’s credit report to show who has first claim to the pledged collateral. A UCC lien instead secures a loan and creates a public record.

The fact that one lender already has a high-priority stake on a particular borrower’s collateral sends a message to other possible lenders that the lender who filed a UCC lien will be first on the list for the assets. Anyone else will be second, third, fourth, etc.

Ultimately, a lien protects the lender and prevents a borrower from using the same item or items as collateral for various lenders at once.

Let’s take a look at some of the different filing statements associated with UCC liens.

The statements are:

  • UCC-1: Also referred to as a Financing Statement, Form UCC-1 forms the lien against a borrower’s asset(s). The UCC-1 Form is usually filed through the Secretary of State office where the debtor is incorporated and includes the name and address of the debtor, the name and address of the creditor and a description of the collateral.
  • UCC-3: Form UCC-3 is a multi-use form that is used to make amendments to Form UCC-1. Four actions can be taken through this form: Amendment, Assignment, Continuation and Termination.
    • UCC-3 Termination: This form terminates the agreement and can be completed once the loan has been repaid in full. It shows that the creditor no longer has claim to the collateral.
    • UCC-3 Continuation: This UCC-3 form is filed to continue an agreement for another five years. UCC filings expire after five years, so will need to be renewed for long-term loans.
    • UCC-3 Amendment: This form makes changes or adjustments to Form UCC-1.
    • UCC-3 Assignment: This form is used when a secured party has to assign or transfer its rights to the collateral.
  • UCC-5 Information Statement: This form notes the occurrence of an error.

Two types of UCC liens:

There are two types of UCC liens, a collateral lien and a blanket lien.

A collateral lien occurs when a business files a lien against a particular asset instead of all of a business’s assets.

A UCC blanket lien occurs when a creditor has a security interest in every asset of your business. When a particular creditor has priority to a business’s assets, then a debtor may have difficulty securing more funding because of a lack of choice collateral.

How to remove a UCC lien on your business

A lien can be removed in two ways. A borrower can visit the Secretary of State’s office to swear an oath that the loan has been repaid in full. Lying while under oath, however, will be penalized with the possibility of jail.

A lien can also be removed by filing a UCC-3 form to terminate the agreement. Lenders aren’t required to file a UCC-3 form, and might choose to wait until the financing statement expires on its own after five years.

How to search business liens

To find out if a business or individual has a UCC lien filed against them, this information can be generally found on the Secretary of State’s website. Databases will vary from state to state.

The lien will list the name of the creditor, the name of the debtor and the collateral. It will be helpful to see what items aren’t listed as collateral.

Bottom line

When a business owner secures a loan and agrees to the terms, the lender will file a UCC lien to protect their investment. The lien does nothing to harm a business and is a normal/standard part of small business financing.

However, should a business need additional funding, the record of a lien could keep a business from securing financing from another lender. So if you have paid off a balance in full, a good idea is to run a UCC filing search to see if a lien still appears on your file, or you ask your bank to file a UCC-3 form.

Otherwise the topic is just one of many for a business owner to learn along their entrepreneur journey.

 

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