Today I am writing about one of the most misunderstood areas of law, the Uniform Commercial Code, aka the UCC, a set of rules governing commercial transactions, and filing of liens under the UCC (the UCC-1). A UCC filing is a notice lenders file when a business owner takes a loan against an asset. As an example, the Small Business Administration filed a UCC lien on any business that took out an Economic Injury Disaster Loan (EIDL) or obtained an SBA 7(a) loan or SBA 7(a) Express loan through the business’s bank. A UCC filing gives a lender a claim on assets a debtor pledges as collateral. The lien serves as a notice to all potential creditors that the borrower owes the lender money and that the lender has an interest in business assets until the debt is repaid.
When a business enters a financing agreement such as a loan or an invoice factoring agreement, secured by collateral, the lender may file a UCC lien against any assets the business pledges to secure the loan. A UCC lien rarely hurts a business’s day-to-day operations but could prevent it from selling assets or receiving additional funding.
There are two common types of UCC filings: a specific collateral lien and a blanket lien. A specific collateral lien gives the lender rights to a specific business asset like a piece of equipment. A blanket lien gives the lender rights to all business assets. A UCC blanket lien, such as the lien for an EIDL, occurs when a creditor secures an interest in every asset of a business. When a lender files a blanket lien against all assets, it becomes difficult to get additional funding for the business until the lien is satisfied, or the lender removes it. With the exception of equipment financing, which is collateralized by the equipment, most business loans require a blanket lien. This allows lenders to issue a broad lien that encompasses all assets of the business.
A UCC Lien can be filed on any type of asset including, but not limited to:
- Investment securities
- Business equipment
- Farm equipment
- Office equipment
- Commercial instruments
- Real estate
- Letters of credit
A UCC filing is initiated when a borrower agrees to pledge assets to a lender for a loan or business line of credit by signing a security agreement. A security agreement gives the lender the right to use specific assets as collateral. Once a borrower signs the security agreement, it is normal for a lender to file a UCC lien against the assets a business pledges to give notice of its rights to any other potential lenders.
Lenders can file UCC liens against businesses or individuals. If there is a default, the first lender to file a UCC lien will have the first rights to that asset.
Checking For A UCC Lien
UCC liens prevent businesses from getting multiple loans collateralized by the same assets. Anyone can do a search for a UCC lien in any state to determine which assets are available as collateral for a loan. All UCC filing statements are public record and are recorded in the state’s public UCC lien filing database. Business owners can search the database using their business information and view the identity of the lienholder along with a detailed description of the lien. You should also investigate UCC liens when purchasing a business.
UCC liens expire automatically after five years, but a lender can renew it on long-term loans.
Filing A UCC Lien
Lenders must file a UCC financing statement with the secretary of state in the state the borrower incorporated their business. Creditors file this to make a UCC claim “perfected” or valid. The UCC-1 financing statement describes the lien, the identity of the lienholder, and the identity of the debtor.
All UCC lien filings are public records and give notice to other potential lienholders or creditors that the assets a borrower pledges as collateral are encumbered. This secures the collateral for the lender and ensures that borrowers cannot pledge the same asset for multiple financing products.
Each state has different ways to search for UCC filings, but borrowers can find them on the local secretary of state website. Most states allow business owners to search by the business or individual debtor names.
Beware – UCC Liens Could Prevent Additional Borrowing
The way UCC liens most often affect small business owners is by preventing them from getting additional financing before satisfying the existing lien. A UCC lien will prevent borrowers from getting most types of traditional business loans until they pay the lien off.
A bank typically will want all the business assets to be lien-free before it approves a loan. If a business has an SBA 7(a) loan or SBA 7(a) Express loan through a traditional bank, it will have a blanket UCC lien filed against all assets. While a UCC lien on a business credit report does not impact the business credit score, lenders often check business credit to see current and past UCC liens.
There are three options for getting financing with an existing UCC filing include:
- Asking lenders to carve out assets from the blanket lien: Borrowers can try to get a lender to carve out certain assets from its blanket lien so that they can pledge those assets to another lender. This can be difficult and requires borrowers to convince lenders that getting additional financing will help the business.
- Refinance the current loan: Borrowers can try to find a lender that will refinance the current loan and combine the balance with the additional financing needs into a single loan. This pays off the current lender and allows borrowers to pledge assets to the new lender.
- Find a lender willing to take a second lien position: Business owners could also find a lender that does not require a first position on collateral. These lenders can take a second position blanket lien on assets and focus on the business’s ability to make loan payments during the underwriting process.
Removing a UCC Filing Lien
Obviously, the first step to removing a UCC lien is to pay off the debt. There are two main ways to remove them. One way is by having the lender file a UCC-3 Financing Statement Amendment. Borrowers can request that a lender file a UCC-3 financing statement amendment. States do not require lenders to file, and most won’t do it automatically. Because they expire automatically, most lenders do not bother filing releases unless a borrower requests they do so. Liens will still show up in a UCC search for up to five years after the lender removes them, but the search will show that the UCC lien was satisfied. Although it will not be removed from the database, it will show that borrower met the obligations to the lender, and the lender no longer has any rights to business assets.
Business owners can also go down to their state’s secretary of state office and swear an oath that the debt has been paid in full. The state removes the lien after a borrower does this with a similar outcome to the lender filing a UCC-3.