Some of the business owners we talk with at Delancey Street ask whether settling their MCA debt will extinguish the UCC lien. And it’s a reasonable question. UCC-1s are standard for how merchant cash advances are secured, and most owners, when they signed up for the MCA, gave the funder the right to claim collateral. So, is a settlement part of getting a UCC lien removed? Yes, but a settlement alone doesn’t clear the public record. The filing only comes off the public record when the debt is satisfied and a UCC-3 termination statement is filed. You may reach that point through a negotiated settlement. The rest of this article explains what that means in practice.
A Legal Claim Against Assets
A UCC filing (short for Uniform Commercial Code filing) is a legal document a creditor files to give notice of its interest in the debtor’s property. These are usually filed with the Secretary of State’s office in the debtor’s state. The form that the creditor uses is called a UCC-1 and it includes information about the creditor, the debtor, the collateral and the terms of the agreement. A UCC lien is a legal claim against assets which were pledged as collateral. Merchant cash advance providers frequently use a UCC lien to secure their investment, and may require a lien on assets like accounts receivable, inventory or equipment. If the business defaults on its payments, the funder has the right to seize the collateral.
There are two types of UCC-1 filings. A blanket or all assets filing encumbers every asset the company owns now and everything it acquires during the term of the financing. A specific collateral filing is more narrow and identifies specific assets, like equipment, inventory or accounts receivable. Lenders can stick a UCC lien on a ton of different assets, including real estate, machinery, vehicles, stocks and securities, accounts receivable, inventory, chattel and letters of credit. If you get an unsecured business loan, you could have a blanket lien on your business assets. That’s when the lender can say “Hey, I’ve got a claim on a wide variety of business property.” But the lien can’t be extended to include your personal assets if your business defaults; it can’t pierce the corporate veil.
A UCC lien can really throw a wrench in a business. To other lenders, it shows a risk, which could make it harder for your business to get more credit. A UCC can hurt the creditworthiness of your business, which could lead to difficulties in negotiating the best payment terms with suppliers and vendors. Finally, if the business defaults on a loan or debt, the creditor may be able to seize and sell the collateral, which can result in the loss of important assets or a disruption of operations. That is why, if a funder’s UCC-1 notice lands on your desk, the smarter move is to read the notice and handle the notice instead of ignoring it.
The First Thing to Do Is Read It
Once you get that UCC-1 notice, the first thing to do is read it. See what the lien is on and what the amount is. Then double check the other information, like the specific details of your business and the terms of your merchant cash advance. Make sure the lender didn’t get anything wrong. From there, you have three main options. You can fight the lien’s validity. You can negotiate a different arrangement with the lender. Or you can take action to pay the debt and have the lien satisfied. Either way, have a real conversation with the lender, be open with them, and get clear on what you’re trying to achieve.
Settlement sits inside the second and third options. If you can settle, make the lien part of the negotiation. Let the funder know clearly that one of your goals is getting that lien released. Once the debt is paid, check back to make sure a UCC-3 termination statement was actually filed. Then, pull the records again to be sure.
UCC-3 Termination Statement
If you want to get rid of a UCC filing, paying the underlying debt in full is the most direct way to do it. Once you do, either you or the creditor should file a UCC-3 termination statement with the filing office, like the Secretary of State. That filing cancels the original UCC from the public record. Skip that step and the problem can outlive the debt. So let’s say you have a UCC filing on your business. You pay off the balance, and you stop hearing from the creditor. Over time, you probably won’t pay any attention to that UCC filing on the public record. Then you come to some time in the future and do want to get a loan, and you get your UCC search, and there it is.
Having a UCC-1 on your business is not necessarily a bad thing. It just means that a lender has a lien on certain assets until it is repaid. But an active UCC-1 lien can hurt you when you’re applying for a loan, even if the debt has been satisfied. If you’re planning on taking out a new loan, make sure you look first for UCC liens on your name or your business name. Check your state’s Secretary of State website. The National Association of Secretaries of State maintains a list of such offices.
You don’t want to fight this battle alone. Call an attorney who specializes in commercial transactions and creditor-debtor disputes if you need to. Touch base with the lender and your counsel to ensure everything is proceeding as planned. Document each step and each conversation you have to provide evidence of your actions if a dispute or legal matter arises later.
Delancey Street is a business debt settlement company. We negotiate for less than the full amount owed to merchant cash advance funders and lenders, and we don’t sell another loan. We’re not a law firm, so if litigation or bankruptcy is the best move, we refer the owner to an independent lawyer. Your first consultation is free and confidential, and if a cheaper solution exists, we’ll tell you on the first call.
