If you’ve ever taken out a business loan, you may see what is called a UCC filing statement on your business credit report.
You might wonder, “What is this? How did it get there? What does it do and how do I get rid of it?”
These filings can make the difference in being approved or denied funding for your business, but understanding them is easy.
What Is a UCC Filing?
A UCC filing is a legal notice by lenders that shows they have a lien on a borrower’s commercial assets as part of any type of business loan.
UCC forms are sent to a state’s Secretary of State office and made publicly available to allow lenders to judge a business’s creditworthiness and take action against defaulted loans.
The term UCC filing is derived from the set of legal standards that the liens are governed under, the Uniform Commercial Code.
What Is the Uniform Commercial Code?
The Uniform Commercial Code, published in 1942, has been used to create set standards by which states govern commercial and business laws. The UCC is a broad statutory program that focuses on small business and entrepreneurial transactions.
The program was mainly enacted to combat two growing issues within U.S. business:
- Contracts and legal intervention became cluttered and unmanageable during business dealings because of a lack of regulation and competing interests
- Businesses in different states had different laws to abide by, complicating transactions and leading to issues with conflicting rules and regulations
Essentially, there was a need to create a blanket of standards by which, for example, a business in Kentucky could quickly and fairly find funding for new equipment through a merchant cash advance (MCA) from a lender in Pennsylvania.
The full Uniform Commercial Code is made up of 9 articles. These articles cover business dealings including the sale and lease of goods, funding transfers, letters of credit, investment securities and others.
Let’s focus on Article 9, which deals with secured transactions that can affect your business’s credit score. Article 9 handles the legal interests that lenders and creditors have with debtors, and is the reason why you may have seen a UCC filing on your business credit report.
Types of UCC Liens
There are 2 types of UCC filing liens that lenders can place on businesses: specific collateral liens and blanket liens.
With specific collateral liens, the debtor pledges certain assets that the lender will have a claim to. These liens are common for equipment and inventory loans, with the collateral usually being what the business owner used the funding for. For instance, the collateral for a loan to purchase a new forklift for a packaging company may be the forklift itself.
A blanket lien takes place when the lender places a claim on most, or all, of a business’s total assets. If a debtor is in default on a loan, the lender will then have claim to foreclose on or sell off all assets needed to satisfy the debt.
Both types of liens are categorized as a “UCC-1” filing as part of Article 9 in the Uniform Commercial Code.
What Is a UCC-1 Filing Used For?
A UCC filing is used to protect the interests of lenders when working with commercial borrowers. When obtaining funding, a lender will “perfect” a UCC-1 filing as part of the contractual loan agreement to protect their interests. The debtor and lender must agree on the assets that may be seized before the contract is completed, therefore satisfying the Uniform Commercial Code.
In the case of a UCC lien, the lender of a business loan needs to be able to secure collateral to recoup their losses in case the loan agreement is breached.
Consider how a mortgage works: When a mortgage loan agreement is made, the bank will place a lien on the house. If the mortgage goes into default, the lien is used to give the bank legal recourse to seize the house.
Who Uses UCC Filings?
UCC financing statements generally are filed with a state’s Secretary of State office and are then considered legally binding. The documents are then placed into public record as a UCC-1 financing statement, which lenders use to receive court orders to seize collateral.
Being publicly available also gives potential lenders the ability to see if a business already has UCC liens placed against it. This lets lenders them know they won’t be first in line to be paid if a business is unable to pay its debts.
This information helps lenders make decisions and is visible on credit reports, which is why it is important to understand how it can affect your business credit score.
Is a UCC Filing Bad for Your Business Credit Score?
A UCC filing on your credit report isn’t necessarily bad, but it could lead to complications if you don’t make your payments or need a secondary loan.
If there is a UCC-1 financing statement on your credit report and you make all payments on the loan it was derived from, there is no cause for concern. The presence of the lien on your company’s credit report is common, with hundreds of thousands filed in each state throughout the U.S. It won’t affect your credit score itself and is only there to let the business owner and any lenders know that a lien is in place.
A loan default, however, can significantly impact your business. When action is taken on a UCC filing, there are a few consequences.
First, the assets agreed upon when perfecting the lien can be seized, leaving a business without the equipment or inventory it needs.
As with missing a payment on a credit card, the execution of a UCC lien by seizing your assets will show up on your credit report as a default. The negative impact on your business credit score will cause potential problems if you want to qualify for a future loan.
Can a UCC-1 Filing Affect Your Ability to Secure a Business Loan?
When applying for a small business loan, UCC-1 filings are one of the factors that a lender considers when determining whether a business owner qualifies for funding. Lenders can be cautious or even deny loans to applicants with active liens, especially if they were in default.
Previous loans in default and derogatory credit items aside, it is possible that filings for loans in good standing can still affect your company’s creditworthiness.
One of the reasons that the Uniform Commercial Code was put into place was so that lenders are aware of dealings a business has with others, including active liens.
Some lenders will be hesitant to work with a debtor that has an active UCC-1 filing in place because, if the debtor goes into default, the lien which was filed first will be given precedence.
After satisfying the lien placed in the “first position,” a small business owner may not have the assets necessary to recoup the losses any subsequent lenders may incur. The risk may not be worth it to the potential lender, which could make it difficult to secure the funding your business needs.
Stay on Top of UCC Filings on Your Credit Report
It’s crucial to get ahead of any UCC lien issues before they can negatively affect your business.
First, find out if your business has any active UCC filings reported against it. Check your business’s credit report or head to the website of your state’s Secretary of State office. You will be able to find active liens and address any issues from there.
According to Cornell Law School’s Legal Information Institute, a UCC filing is effective for 5 years after the initial agreement. If the terms of the loan haven’t been paid off, however, the responsibility is on the lender to file an extension. During that time, it will stay on your business’s credit report and be visible to potential lenders.
After a business has paid off the full balance of a loan, their credit report will still show an active lien until the 5 years (or any extension) have expired. In this case, it is important that the business owner files what is called a UCC-3 statement amendment to remove the UCC-1 filing.
The UCC-3 is used to make sure that liens are taken out of public record when the terms of a loan are satisfied, thus freeing up the borrower to proceed without the mark on their credit report and potentially receive future funding.
You could ask the lender to do this, but it’s possible to terminate the filing yourself.