If your business has fallen behind on a secured loan, you may assume the UCC lien your lender filed rules out a settlement. It does not. The UCC lien on a business loan does not need to be removed to settle the loan. So let’s take a closer look at what a UCC lien means for your business.
A Legal Claim on a Business’s Assets
A UCC lien is a legal claim on a business’s assets placed by a lender. It can be filed when a business obtains financing that is secured by collateral. Also called a UCC filing or UCC-1, it goes on record with your state and covers collateral such as equipment, inventory, vehicles or accounts receivable. A blanket lien means the lender has a lien against all assets of your business. If the loan is not repaid, the lien holder has the right to seize and liquidate the collateral. The other purpose of the filing is to warn other lenders in the event they consider extending credit to your business.
These filings tend to show up in two places. The first is the public record kept by your state, which means anyone who is interested in conducting a background check on you and your business can look it up. The second place is on your business credit report. Dun & Bradstreet and Experian report UCC liens, though Equifax does not.
None of this makes a UCC filing a black mark. After all, UCC-1s are a routine part of the financing process for most businesses. While a lender will look at the filing when they assess your company’s risk, it is not likely to affect your business credit score. The trouble starts when you look for new financing. If another lender sees the lien is still in place, they may be concerned about being able to collect and they know they will be the second lender to collect, so they may not be able to collect any of their money. A blanket lien which ties up a business’s entire collateral base is the most problematic kind of lien. UCC liens can also affect your business in ways beyond loans. For example, vendors may be wary of extending trade credit if there’s a lien. Additionally, landlords may view multiple liens as a sign of potential financial trouble, and insurers may also consider liens when determining premiums.
Settle Your Loan and Get the Lien Removed
So where does settlement fit in? A lien does not prevent a lender from agreeing to an arrangement with you. You can pay the full balance to settle your loan and get the lien removed. Doing that is not always practical, however, especially if it ties up a lot of cash. You can also negotiate to pay only part of the amount you owe. And the lender may choose to release particular assets as collateral if you want to repay the loan over time or sell particular assets. If the lender forgives part of your debt, the canceled amount could be taxable as income. Find out how these taxes work, and check with a tax advisor.
UCC-3 Termination
Before you go out to celebrate though, you have to think about filing a UCC-3 Form. A settled debt still leaves the filing in place until someone updates it, and you have to make sure that the active lien is resolved, which means you need to either get a release from your lender or make sure that they have filed a UCC termination. Once the final agreed payment clears, you should request in writing that the lender file a UCC-3 Termination with the Secretary of State. Your request should include the company’s employer identification number (EIN), loan account number and file number, as well as the date of your final payment. Ask the lender to send you a stamped copy of the UCC-3 Termination filing. In most states, a lender has 20 days to file a UCC-3 from the date of your request, but they don’t always do so. Follow up with them after two weeks. Some lenders will charge anywhere between $25 to $100 to file the UCC-3. A week after the lender notifies you that the UCC-3 Termination has been filed, check the status in the UCC database for your state.
If the lender is no longer cooperating, has gone out of business, or has sold the debt, you can file the UCC-3 termination form yourself with the Secretary of State. You’ll need to provide the original UCC-1 file number, documentation showing the debt has been satisfied, proof that you requested the termination from the lender, and a sworn statement confirming the debt was paid in full. State filing fees range from $10 to $50, with processing times of 1 to 3 days online or 2 to 4 weeks by mail. Keep in mind that not all states permit this process without the lender’s participation. You should consult the state filing office or an attorney for your state’s specific requirements.
Then turn to your business credit reports. If Dun & Bradstreet or Experian still lists the lien, file a dispute. The credit reporting agencies might require you to submit all documentation, including a stamped copy of the UCC-3 and proof of your payment, and a copy of the termination filing’s date. Let them know about the termination and that the lien should not be on your business credit report. They will usually take up to 30 days to investigate your claim and you will have to pull another report to see if the agency removed the lien or not. You may not be able to remove the filing from the public record. For example, the Secretary of State’s office in Arizona warns that its UCC 5 form, used to claim a lien is inaccurate or was filed in error, will not remove the filing. Once recorded at the Secretary of State, a UCC financing statement remains on public record for five years unless extended or renewed. After five years, the UCC filing is considered lapsed. Wyoming is the exception, at ten years.
Seek legal counsel
- if the lender will not terminate the filing despite repeated requests;
- if the borrower stands to lose a major financing transaction because of the lien;
- if the lender is out of business or the borrower cannot find who is authorized to terminate the filing;
- if the filing is fraudulent; and
- when multiple parties assert security interests in the same collateral.
Above all, start early. Changes to state records and credit reports can take 30 to 90 days, and if you discover a problem while trying to close on financing, you will likely miss the opportunity. Knowing whether there is a lien on your collateral is important for any company planning to borrow money in the coming months. The bottom line is that a UCC lien has nothing to do with whether you can settle your loan. It does come up during the lending process, and you may need to have a lien released or terminated to get the next loan you need. Despite a UCC lien, your lender may be willing to work out a deal.
