If you have looked at your business credit report, you may have seen something called a UCC filing statement and it might be affecting your business credit score. It is important for business owners to understand what they are because if you do not, it can lead to issues down the road when you are trying to secure approval for credit.
What Is a UCC Filing?
A UCC filing is a legal form that a creditor files in order to secure the person’s interest in the personal property/assets or a debtor. The creditor has the right to take possession of certain assets as repayment of underlying debt. Creditors can see what assets have a UCC filing connected when a creditor pulls your business report.
The term UCC filing comes from the set of legal standards that liens are governed under which is the Uniform Commercial Code. The UCC is a program that focuses on small businesses and entrepreneurial transactions. It was created to standardize the process of the transactions in multiple states by creating more harmony and uniformity.
Types of UCC Liens
The two types of UCC liens lenders place on businesses are called specific collateral liens and blanket liens.
- Specific collateral – this puts a lien on one or more specific assets you own. It is common for equipment and inventory loans, where the collateral is usually being what the business owner used the funding for. For example, if you want to purchase a new forklift then the forklift itself is the collateral.
- Blanket – this lien is where the lender claims most or sometimes even all the business’s total assets. Blanket liens are common with traditional bank loans, SBA loans, and short-term loans. The types of assets included in a blanket lien are real estate, office equipment, letters of credit, vehicles, inventory, and accounts receivable and payable.
What Is a UCC Filing Used for and How It May Affect Your Business
A UCC filing is used to protect the interests of lenders when working with commercial borrowers. The lender and borrower must agree on the assets that could be seized before the contract is completed. In case of a UCC lien, the lender of a business loans needs to be able to secure collateral in case the borrower defaults on the agreement.
A UCC filing listed on your business credit report may tell lenders that your business is not financially stable. Even if you have had debt obligations from the past that were paid in full, UCCs can stay on your report for years. A UCC filing on your report can negatively affect your overall credit and affect your chances of getting financing for your business.
What Happens If You Default?
It depends on where you live to determine what happens if you default on a loan. States have strong protections in place for the personal assets of the borrowers. A creditor with a UCC lien against your assets could go after things like cash from your bank account, your car or personal property, and any assets in the UCC-1 filing. States place rules to protect equity of your home, a personal vehicle, retirement funds, and business equipment.
How to Get Rid of a UCC Filing
If you successfully pay back your loan, the lender needs to file a UCC-3 financing statement to end the UCC lien. However, often times lenders forget to file the UCC-3 even after the borrower has repaid the full amount. This can be problematic if you decide to look for another loan. You should immediately request that the lender terminate the lien on the said assets by filing a UCC-3 termination form. If the UCC filing remains on your report even after filing the UCC termination form, you can appeal to your secretary of state’s office to have it removed. You can also dispute the inaccuracy through the credit reporting bureaus directly.
The Bottom Line
By now you should have a firm understanding of what a UCC filing is. Since UCC filings are public records, lenders can use them to find customers that are familiar with their products and give them financing offers. Be sure to always check the status of UCC filings against your business by looking at your business credit report or searching UCC lien public records.