A uniform commercial code (UCC) filing is a registered note submitted by a lender when a loan is taken out and secured against an asset or multiple assets. The filing acts as a lien against the collateral, giving the lender right to possession in case of default.
A UCC filing also informs other lenders that the borrower has used particular assets to secure a loan, so that creditors can make decisions on whether to approve a loan.
UCC filing is a common practice among lenders, and it's one you should know if you're a small business owner taking out loans. Learn what a UCC filing means for your current assets and future loan potential.
Definition and Example of UCC Filing
The uniform commercial code is a set of rules adopted by state law that governs commercial transactions. The guidelines aid in enforcing business contracts and adding certainty to business relationships.
- Alternate names: Uniform commercial code filing, UCC lien, UCC-1
A UCC filing allows lenders to inform other lenders of how a business’s specific property has been used as collateral on a secured loan.
A lender submits a UCC filing that creates a lien on the asset or group of assets used as collateral. The registered note secures the loan, adding security to the business deal between the creditor and borrower. This expires after five years, although it can be renewed by the lender if repayment continues.
Small businesses, for example, often take out loans to fund start-up costs, production, and growth opportunities. A lender may submit a UCC filing on these loans to create security in the loan repayment. In this way, the creditor can ensure they have priority with a lien against the borrower. This entitles the lender to foreclose on assets before other lenders if the business defaults, which makes the loan more reliable to the creditor.
How a UCC Filing Works
Lenders commonly file a UCC lien to create a secured loan when working with businesses. It signifies to other creditors that the business already has collateral tied to another guarantee. The first lender gets the security of knowing their repayment terms will be met, either through timely payments from the owner or from selling the secured assets in the event of a default.
A UCC filing can be made against one asset, a group of assets, or all the company’s assets. A filing will be for a blanket lien or a specific lien, depending on the collateral used. Assets that a lender can take out a lien against include:
- Bank or trade accounts
Small businesses utilize loans to fund growth and newly established operations. Many lenders want to ensure that a small business, which may lack credit history, will adhere to the loan’s terms. Collateral, usually on non-titled assets, provides a lender with more assurance that the loan will be repaid.
Let’s say you have a manufacturing business that needs funds to expand to a new location. Your lender is willing to provide a loan, but only with collateral to secure it, such as manufacturing equipment.
You can negotiate which assets are listed as collateral, but your lender may have specific requirements for what they will accept to back the loan. The amount and type of collateral will depend on several factors, such as the amount of the loan, the value of your assets, and your creditworthiness.
Once the collateral has been approved, the lender creates the loan using the assets as collateral. They then submit a UCC-1 financing statement to secure the loan through the Secretary of State offices where the business is incorporated. This document identifies the business, the lender, and the collateral being secured, and, once submitted, becomes a public record.
A UCC filing appears on your business credit report. Although this won’t directly impact your business credit score, other lenders or investors will factor in a UCC filing to determine your creditworthiness.
Effects of a UCC Filing on a Business
A UCC filing has little effect on your business if you make timely payments and don’t plan on taking out more loans. However, there are a few impacts to consider.
First, your business credit report shows UCC liens from the past five years. It informs other creditors of your repayment on prior loans, total amounts borrowed, and any current liens. A loan application may be turned down if your assets are already used as collateral with another lender.
UCC filings also dictate whether funding can be secured with your assets, and the risk associated with a loan. You can’t use assets to secure funding from more than one source because a second lender would not have the same security if they don’t have priority on a lien.
You may be able to refinance and remove certain assets from the current loan if the lender submits a lien amendment.
Finally, secured loans pose a risk to the borrower whether or not a UCC filing is made, because they could lose their assets if they can’t meet their loan obligations.
Types of UCC Filings
UCC-1 statements can be liens for specific collateral or a blanket lien that gives the lender the right to seize several or even all of a business’s assets.
A UCC filing is made against the specific collateral and is commonly used when a business owner is buying a new piece of equipment or in real estate transactions.
Blanket liens are used when a lender requires the right to a lien against several or all assets the company owns. Usually, a business owner secures a large amount of funding when a blanket filing is made. A blanket lien can place the owner in a position of not having assets to use to guarantee other loans.
- A UCC filing is a registered note submitted by lenders that acts as a lien by securing specific assets as collateral on a business loan.
- Also known as a UCC lien, the filing becomes a public record and informs other creditors that the business’s assets are acting as collateral for a loan.
- A UCC filing can affect a business if it goes into default or needs to secure additional funds.
- Some UCC filings identify specific assets to use as collateral, while others serve as a blanket lien covering several or all assets.