Here’s the scenario… You might have a UCC filing with the local secretary of state’s office on business debt. It can make it difficult for you to get additional working capital and more funding, now or in the future. So you pay the debt. How do you get the filing removed? What are your steps? Now, let’s say you get your UCC-1 off your business. Do you have a tax bill?
We at Delancey Street, a business debt settlement company, negotiate with MCA funders and lenders on behalf of business owners. Some owners ask us whether taking down a UCC filing has tax implications. When a UCC lien is removed, that’s just a filing with the lender and the Secretary of State. Whether paying off or settling a debt has tax consequences is a question for a tax professional, not us - we’re not a law firm - and when it comes to tax work we’ll send you off to an independent attorney. What we can do is explain what the filing is, how it comes off, and what taking it off does and doesn’t fix. Why do we spend so much time covering the UCC if this post is about taxes? Because you should not be putting the cart before the horse.
A Lien on the Pledged Assets
UCC stands for the Uniform Commercial Code, a law covering commercial transactions in the United States. A UCC filing starts when your company agrees to pledge assets to a lender. Once everyone signs, the lender files a UCC-1 financing statement with the Secretary of State. This creates a lien on the pledged assets. It’s first come, first served: if two lenders take a lien on the same property, the one that filed first gets paid first in a default.
Is it hard to figure out who’s got a UCC filing on you? Not especially, because UCC filings are liens, and therefore a matter of public record. Anyone can find out that they’re out there. If you default, the lender gets the right to take whatever assets the lender has a lien on to make itself whole. It’s not hard for lenders to do a quick search for existing liens before deciding to lend you anything to make sure they won’t have a second lien. And many states offer those searches online at a reasonable price. On the other hand, if the secured collateral is different for each lender who lends to the business, a UCC-1 lets the business borrow money from more than one lender.
A UCC-1 filing is good for five years, so if your loan lasts longer, your lender will have to renew it. They can also file updates if the assets are different, and the most common things used as collateral are accounts receivable, office equipment, real estate, inventory, vehicles, big operating equipment, and letters of credit. A blanket assignment means the creditor has a security interest in all of your business’s assets. Blanket liens are more common with traditional bank loans, alternative business loans, and SBA loans. If you default, every asset covered by a UCC-1 lien can be seized.
Additional Loans
The bigger everyday problem for an owner is that liens can make it harder to get additional loans. Lenders are cautious about you taking on more debt when you’ve already secured the assets with a lender. A UCC filing generally won’t influence your business credit score, though it may appear on your business credit report. It can, however, impact your ability to obtain a business loan if the sole collateral you have against the loan already has a UCC lien. That doesn’t mean you won’t qualify for financing - but you may not get the same amount or the same terms. A UCC record can be easily accessed, so it will likely come up when you need to file for a business loan. One solution to a lien blocking a new loan is to ask your first lender about re-negotiating the security on the first loan. If the first lender agrees, they may then file an amendment to the first UCC filing, and then you will be free to use that asset to secure the second loan.
File a UCC-3 Form to Terminate the Lien
So the key question is: Has the loan been paid in full? If you want to remove a UCC filing from your records, you have to pay off the loan first. After that, you should ask your lender to file a UCC-3 form to terminate the lien. If they won’t do that, then you can head to the Secretary of State’s office yourself and swear under oath that you paid off the loan and that the creditor no longer has any claim on that asset.
You might think that by paying the lender, the whole problem is behind you. Not so fast. It’s important to remember that even if you terminate the lien, that doesn’t necessarily mean it’s removed from your business credit reports. For example, Dun & Bradstreet won’t remove a UCC lien until the customer requests removal or it has been inactive for 11 years. A good practice is to keep an eye on your business credit reports. Business credit monitoring is an absolute must! So, if you ever have a UCC filing showing up on your business credit report that shouldn’t be there, you can appeal to have it removed. You can also appeal other inaccuracies in your business credit report so that it provides an accurate assessment of your creditworthiness.
UCC liens aren’t necessarily bad, sometimes they are necessary in order to provide collateral for a loan, so don’t be afraid to use them but be smart when you do. If you’re behind on merchant cash advances or business loans, though, the lien is only one piece of the problem. Our senior advisors negotiate with funders and lenders for less than the full balance owed, and a first consultation is free and confidential. If you have tax problems with the IRS, that requires separate consideration.
