What A UCC Filing Is & How It Could Affect Your Small Business

Small business financing often requires a UCC lien on your business assets. If you have taken out a small business loan in the past five years, there’s a good chance your business has a UCC filing, meaning that a creditor has placed a UCC lien on the assets you are using as collateral to secure the loan. But many businesses on the brink of accepting a loan offer wonder how a UCC filing will affect their business. You might also be wondering, “Is a UCC filing bad?” Or “Hey, what is a UCC filing, anyway?”

Though UCC liens are very common, it’s important that you know what you’re getting into if you’re considering a loan that comes with a UCC lien. If you don’t read the fine print, you may not even realize you have a lien against your business until you see a UCC filing on your credit report. This can be alarming, to say the least, and especially so if you’ve already repaid the loan in question. For these reasons, it’s necessary that you know what you’re getting into with a UCC filing and that you are aware of any UCC filings on your business. 

This article discusses the ins and outs of UCC filings, including how UCC filings can negatively impact your business, how to check your UCC filing status, and how to remove a UCC filing.

What Are UCC Filings?

A UCC filing is a public record signifying that there is an active UCC lien on your business assets. When you take out a small business loan that uses a UCC lien as collateral, your business lender will create a UCC filing with the secretary of state where you live.  The UCC filing means that until your loan is repaid and the UCC lien is removed, the lender has a security interest in your assets and can lay claim to those assets should you default.

The letters “UCC” refer to the Uniform Commercial Code, a set of legal standards which govern business transactions in the United States. A UCC filing is also sometimes referred to as a UCC-1 Financing Statement, or UCC-1 filing.

Are UCC Filings Bad?

UCC filings are not necessarily bad. Most business financing is secured with collateral, and a UCC filing is a standard step in the process to obtain a collateral-secured loan. The UCC filing simply a legal notice stating that a lender is using a lien to secure your business loan.

However, UCC filings are public records that other parties—including other lenders—can view, and they will show up on your credit report. Having a UCC filing on your credit report can potentially make it harder for your business to obtain additional financing before the lien is removed or expires. Should you default on your loan, the lender can also enforce the UCC lien to seize your collateral.

Types Of UCC Liens

A UCC lien may cover specific collateral, such as invoices, inventory, or business vehicles. Another type of UCC lien is a UCC blanket lien, which covers all of your business assets.

Blanket Liens

Many small business loans require a UCC-1 blanket lien. A blanket lien is a general lien covering all of your business assets. This lien gives the lender a lot of power, as it allows them to seize any and all of your business assets should you default on your loan. For this reason, many SMB lenders prefer using UCC blanket liens.

An example of a type of business loan requiring a UCC blanket lien is an SBA loan. UCC blanket liens are also commonly required for short-term loans.

Specific Collateral Liens

Specific collateral UCC-1 statements are liens against certain specific business assets. This type of lien is used in commercial real estate loans or business auto loans wherein the real estate or vehicle being purchased is used to secure the loan. Specific collateral liens are also used in specialized forms of business financing such as invoice financing, inventory financing, and equipment financing.

For example, if you finance a business vehicle with a loan that has a specific collateral lien, you are pledging your vehicle as collateral. This means that if you don’t repay your loan, the lender can seize the vehicle but can’t touch your other business assets.

How UCC Liens Affect Your Business

A UCC lien can affect your business in several ways during different points during the life of the lien. In the best-case scenario where you repay your loan and don’t need another business loan before you’ve paid off your first one, a lien will not really affect your business at all. However, in the worst-case scenario where you have a lien on an outstanding loan that you haven’t repaid, your credit will be damaged and the lienholder can even seize your assets.

When A UCC Lien Is Filed

Once the UCC-1 filing occurs, the lien will start appearing in public record searches and on your credit reports. This lien filing notifies other potential creditors that you owe money and gives the identity of the creditor or creditors who have a security claim on your assets. The UCC filing also states the status of the loan. While a UCC filing will affect your credit utilization ratio, the existence of a UCC lien should not seriously harm your credit unless you stop paying on the loan and it goes into default.

When A UCC Lien Is Enforced

If you don’t repay your loan within the agreed term, your creditor has the right to enforce the UCC lien it has against your business and seize your business assets. In order to enforce the lien, they will need to take you to court and win a judgment against you. This will also damage your credit score. In some cases, the lender may decide it’s not worth the effort and not go through the steps to enforce the lien. But again, your credit score will still be impacted if you have a UCC lien on an unpaid loan.

When You Apply For Other Financing With A UCC Lien

A UCC lien can make it difficult to obtain additional financing while the lien is still active, even if your loan is in good standing. This is because many lenders do not want to take second position on your collateral. If you have separate collateral you can use to secure a second loan, this may not be a problem. But again, many types of small business loans use a UCC blanket lien, which covers all of your assets.

When A UCC Lien Expires

After a UCC lien expires, it will no longer affect your business or impact your ability to obtain financing. A UCC lien has a set term, which is usually five years. After the term expires, the lien expires as well and will stop appearing in your business searches. However, if you still haven’t repaid the debt after the lien expires, the lender can file to renew the UCC lien.

How To Check If You Have A UCC Filing On Your Business

Now that you know more about what UCC filings are, you might want to check if your business has any filings. There are a few different ways to do this:

Search Your State’s Secretary of State Website

Most states have searchable directories of UCC filings where you can see if you have a UCC filing. Simply find your secretary of state’s website and locate the UCC filing directory. There, you can usually search UCC filings by the name of the debtor or your financial statement number. If you find a UCC filing associated with your business on the secretary of state’s website and want to request more information, you will be able to order a full report.

Search County Clerk’s Records

If you have a specific collateral UCC lien secured with real estate, the UCC filing could be filed with your county clerk rather than the secretary of state. In this case, you’ll need to search property records from the county clerk’s website to find your UCC filing. Not all counties have comprehensive online services, so you may need to go to the county clerk’s office in person to search or retrieve a copy of your UCC filing.

Use A Commercial UCC Search Site

If you can’t get the information you need from government websites, there are also commercial UCC search services you can pay to do a comprehensive UCC filing search. This type of service can also be useful if you have multiple liens in different jurisdictions.

Check Your Business Credit Report

An active UCC lien should appear on your business credit report—but probably not your personal credit report. If you suspect you have a UCC filing, you should check your business credit reports to see the filing and the status of the lien. You may not be able to see the full details of the filing, however. Still, it’s a good idea to regularly monitor your business credit reports with all of the major credit bureaus—Dun & Bradstreet, Experian, and Equifax—to check for UCC filings.

How To Terminate A UCC Filing

If you discover you have old liens placed against your business, you will most likely want a UCC filing termination. There are really only three things you need to do to terminate a UCC filing:

1. Pay off your debt, if you still owe it.
2. Ask your lender to file a UCC-3, which terminates a UCC lien.
3. Request a UCC-3 from your secretary of state if your lender won’t file one.

That’s basically it! The main thing is really to get that UCC-3 form filed, since this is the specific item needed for a UCC filing termination. Unfortunately, many lenders don’t file a UCC-3 automatically after you pay off a loan, so again, you may need to request one. If you don’t do anything to terminate a UCC filing, it will eventually expire and disappear from your credit reports—but in some cases not for 10+ years—provided that the debtor does not renew the lien. If a terminated UCC filing is still appearing on any of your business credit reports, you can dispute the inaccuracy with the credit bureau to get it removed.

Finally, if you need a small business loan and want to avoid a UCC filing altogether, you should probably look into an unsecured business loan with no UCC lien. You can check out your best unsecured loan options here: Top 15 Best Unsecured Business Loans