Business owners who are struggling with payments, whether it’s a business loan or merchant cash advance, often wonder whether the UCC the creditor filed against their business will fall off the books by itself. The short answer is yes, but it’ll be a while, and the creditor can renew it. A UCC filing expires automatically after five years from the date of filing unless it is extended within six months from the date of expiration. After expiration, the creditor is usually deemed unsecured. That last part is where the real consequences sit, so it helps to understand what the filing does while it is still in place.
A UCC-1 is like a public announcement that a creditor has an interest in your personal property. You see them all the time when it comes to business loans. Since the filing is a matter of public record, other lenders can check to see who has already filed against a business, and if more than one lender has filed, they’ll know who has priority. The Uniform Commercial Code is not federal law, but it has been adopted by all 50 states, so it does provide a set of consistent rules from state to state.
A lender can only enforce its rights against a debtor’s personal property if it has a perfected security interest. To have a perfected security interest, it must file the UCC-1 in the right filing office. When you are unable to pay (or if you go bankrupt), the lender with a perfected security interest has first claim to the property used to secure the loan. It gets to the front of the line if your assets are split up by a court. If the lender has not filed a UCC-1, it must wait behind other secured lenders to collect. That place in line is exactly what a creditor gives up when its filing lapses and it becomes unsecured.
Because the creditor can extend it, waiting is not likely to be a real strategy for an owner under debt pressure. Focus instead on the underlying debt, since once you’ve paid off your obligations to a creditor, the filing can be removed. The truth is, a UCC filing doesn’t have to stick around until the five-year mark. If you’ve made all your payments, you can take steps to officially erase the UCC filing from your credit report and record before that five years are done.
While the filing is there, it does carry weight. To be fair, having a UCC filing is not, by its nature, a bad thing. It’s a common step in the lending process, and it doesn’t impact your operations and it’s just a notice of a security interest. It’s not operational control of your business. But a UCC filing will show up on your business credit report and can bump up the credit utilization ratio. That could impact your credit score and be a barrier to getting money from other funders who may not want to be last in line behind a secured party.
Not every UCC is created equal. Funding companies may use floating liens and blanket liens, which mean they have a claim on a piece, a category, or everything a company owns; while others may only hold a claim on specific collateral like receivables. In fact, floating liens may even justify shipment stoppages from vendors if a company fails to pay. That said, a UCC filing doesn’t automatically prevent future funding, but lenders would see it and it might affect their assessment of how much collateral you have and the risk involved. Broad or blanket UCCs can limit flexibility with future lenders.
If you are not sure whether anyone has filed against your business, you can find out. Start by checking your funding agreements for any mention of UCC filings or security interests, collateral, or even amendments. Then head to the UCC division of your Secretary of State website, in the state where the company is incorporated or where its assets are located, and type in the business’ name.
If you’re looking at some new funding, make sure to ask a lot of questions. First, does the funder file a blanket UCC or a limited-scope UCC? And when do they file it, before or after the funding? How long will it be on the books? And, will they remove it once you’ve finished making payments? And because filing a UCC-1 can complicate your ability to access working capital later, we strongly advise you to map out your capital needs 12 to 24 months in advance.
The Debt Is the Thing to Deal with First
If the filing on your business is tied to a debt you can no longer keep up with, the debt is the thing to deal with first. Delancey Street negotiates deals with merchant cash advance funders and lenders on your behalf for less than the amount you have left to pay. We don’t sell another loan. The first consultation is free and confidential. We’re not a law firm. If your business has gotten to a point where it needs to sue or file bankruptcy, we’ll connect you with a trusted outside lawyer.
So yes, UCC filings do expire automatically, five years after they are filed, unless the creditor extends them in time. Until then, the filing is worth understanding, and the debt behind it is worth addressing.
