Small business owners may be familiar with the term “UCC filing.” It could crop up in the context of borrowing money for your business. You may think that it’s a technical expression that has no practical relevance.
That couldn’t be further from the truth.
It’s essential to know what is a UCC filing and the implications that it could have for your company.
In this post, we’ll do a deep dive into UCC filings. We’ll also understand how they’re relevant for your business and the steps that you need to take in connection with them.
What is UCC?
UCC stands for the Uniform Commercial Code, a set of regulations that are applicable across the country for conducting business.
Also referred to as a UCC-1 filing and UCC liens.
The UCC is needed because each state in America can make its own laws. The UCC ensures that if you are doing business with someone in another state, there’s a standard set of applicable rules. This makes the process of entering into transactions across state lines more straightforward and predictable.
What is a UCC filing?
As the phrase implies, a UCC filing is a filing made under the Uniform Commercial Code.
When a small business owner borrows money from a bank or a financial institution, the lender may insist that the business owner provide some collateral as security for the loan. This could be in the form of factory equipment, inventory, or practically any other asset that belongs to the entrepreneur.
If the borrower doesn’t repay, the lender can seize the assets provided as collateral and sell them to get its funds back.
Now, here’s where a UCC filing comes in.
At the time of providing the loan, the bank or financial institution submits a UCC-1 Financing Statement to the Secretary of State in the business’s home state. This statement contains the lender’s name and address, the borrower’s name and address, and a description of the collateral.
This process results in a public record. Anybody can visit the site of the National Association of Secretaries of State, select the relevant state, and verify a debtor’s collateral.
The UCC filing is valid for five years. If the loan is not repaid within this period, the lender can apply to renew the filing.
What happens if the loan is repaid in less than five years?
Does the UCC filing remain active even if you don’t owe any more money to the lender?
Unfortunately, there isn’t any automatic process for the removal of the UCC filing. The lender needs to file what is called a UCC-3 Financing Statement Amendment. This requests the office of the Secretary of State to remove the lien on the assets provided as collateral.
There’s another option, as well. The borrower can swear an oath of full payment at the Secretary of State’s office.
UCC filings and your credit
A discussion on the topic of what is a UCC filing would be incomplete without talking about its impact on your business credit report.
You should know that your business’s credit report would include a reference to any UCC filing regarding your assets.
When you repay a loan with a UCC , you should ensure that that lender terminates the lien. This will help to provide a factually correct picture to any prospective lender who is reviewing your credit standing.
What is the Uniform Commercial Code?
We mentioned that UCC stands for Uniform Commercial Code.
The UCC was first published in the 1950s. The National Conference of Commissioners on Uniform State Laws (NCCUSL) and the American Law Institute (ALI) worked together to produce this regulation.
The Uniform Commercial Code has nine articles. These are:
- General provisions regarding how the Code is to be applied
- Sale of goods. The UCC does not address real estate and service contracts
- Negotiable instruments like checks and drafts
- Bank deposits
- Letters of credit
- Bulk sales, auctions, and liquidation of assets
- Documents of title
- Investment securities
- Secured transactions of personal property, agricultural liens, promissory notes, consignments, and security interests.
When we’re addressing the question of what is a UCC filing, we need to refer to Article 9 of the Uniform Commercial Code. That’s the article that describes security interests.
“A security interest is a legal right given by a borrower to a lender. The right is over the borrower’s property. The lender can repossess the property in the event of default by the borrower.”
Specifically, Article 9 sets out the rules regarding secured transactions. This includes the regulation that says that the lender has the right to seize an asset provided as collateral by the borrower.
When do UCC filings happen?
A UCC filing is made when a loan is originated. The lender informs the Secretary of State about the loan and the details of the security.
There’s another issue that needs to be mentioned when we are on the subject of what is a UCC filing. It’s essential to know at which point in time the security interest was created.
Why is this important?
Consider a situation in which the same asset has been provided as security to multiple lenders. Which lender will have the first right over the asset?
If the borrower defaults, the lender who filed the UCC-1 first will have the first right over the collateral. The other lender(s) will be paid from the amount received from the sale of the asset only if there is any money left over after the first creditor has been repaid.
What is a UCC filing: types of filings
There’s another aspect to the subject of what is a UCC filing. There are two broad categories of filings or liens:
- Specific collateral lien
- Blanket lien
A specific collateral lien involves a particular asset. This could be a vehicle or some equipment.
The key issue is that it should be possible to identify the asset that has been provided as security. If the borrower doesn’t repay the lender, only the asset that has been provided as collateral can be seized. The lien does not extend to any other possessions of the borrower.
A blanket lien is different. In a UCC filing involving a blanket lien, the lender has a right over every asset of the borrower.
From a borrower’s standpoint, a specific collateral lien is preferable. However, many lenders, including traditional banks, insist on a blanket lien. Loans guaranteed by the SBA also usually require a blanket lien.
Filings and collateral
If you are planning to apply for a loan that requires collateral, you’ll probably be asked to sign a UCC-1 form. Ensure that it’s correctly filled out. Pay special attention to the description of the assets.
Additionally, after you have repaid the loan, ask the lender to terminate the lien. This is important, as it will ensure that the UCC filing is removed from your business credit report.
We hope you enjoyed reading this post. At Camino Financial, we’re committed to providing you with actionable information that can help you to run your business more efficiently and profitably. That’s why our motto is “No business left behind.”
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