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There are lending criteria’s for each lender and each state but when applying for a business loan, everyone must follow the Uniform Commercial Code (UCC) filing. UCC filings or liens are a legal declaration from the lender to notify the interest in the collateral offered by the borrower. The UCC filings allow lenders to claim collateral that a debtor uses for securing financing. You might have seen a UCC-1 filing on your business credit report.
Today we will explain what you need to know about UCC filings and how it might affect your business, especially when you are trying to get a business loan.
What is a UCC Filing?
A lender might file a UCC filing if you are approved for a small business loan. This is a legal form that allows the lender to announce a lien on the secured loan. Your collateral will be seized or sold if you fail to make the payments on your loan.
When applying for a small business loan check if the lender files UCC filings and requires collateral. The following information on a UCC filing includes:
- The creditor’s name and address.
- The debtor’s name and address.
- A description of the collateral, “whether or not it is specific, if it reasonably identifies what is described,” according to the UCC financing statement documents.
A UCC filing is active for five years so a lender needs to renew it to keep the interest protected for loan terms that are longer than five years.
Two Types of UCC Filings
Specific Collateral UCC Lien: this lien gives the lender rights to specific assets that were part of the financing agreement. It is filed in transactions that include financing of assets such as equipment, inventory, and buildings. The asset financed is listed as collateral in the financing agreement.
Blanket Lien: This lien means the lender is claiming all your business’s assets. Blanket liens are favored by lenders because they are less risky since they are secured by more than one asset. They are used for loans from traditional banks and alternative lenders and the SBA.
What Can Lenders Place Liens On?
Lenders can place a UCC lien on many things. The purpose of the UCC filings is to gain security in something. The following are examples of what can be used as collateral for a loan.
- Equipment
- Inventory
- Vehicles
- Property
- Letters of credit
- Security
Note that a judgement creditor cannot take personal property that is legally exempt from creditors. They can force the sale of certain assets and take money from your bank accounts to settle the debt. This is only allowed when the lender has gone to court and has proved the debt is theirs and have not been able to collect the debt. If you are able to pay off your debts, then it will not be a problem.
How do UCC Filings Affect Your Business?
Having a UCC filing on your credit report will not impact your credit score. However, it can impact your chances of qualifying for other forms of financing in the future. Here are the ways it can affect your business:
- It can impact your borrowing power if you have an outstanding loan that has a UCC filing against the business. The bank will want it paid off or you will be offered business loans for bad credit.
- It can impact your business credit by remaining on your credit report for 5 years. It does not affect your score, but it will show up on your credit report.
- A UCC filing means your assets are at stake.
Removing a UCC Filing
To remove a UCC filing you must pay off your debt. If you have a balance on your secured loan with a UCC lien, you cannot get the filing removed.
The next step is to contact your lender and request the filing to be removed. Sometimes your lender can forget to remove the lien filed against your assets. the lender should file a UCC-3 termination form.
The Bottom Line
By now you should have a thorough understanding of what a UCC filing is. It can be an important step to obtain the right financing for your business so make sure to understand the agreement and how it can affect your business in the future. Be sure to keep up with the status of UCC filings made on your business and check the status of it through your business credit report or using public records.
