How to Find Out If There’s a UCC Lien on Your Business

If your business has fallen behind on loans, merchant cash advances (MCAs) or taxes, there’s one thing you need to know before you call your next creditor, buyer or lender: what has already been filed against you? Most business owners don’t know. In a bad year, the owner may have borrowed all sorts of money, and may not remember which of it was secured. With small businesses, the owner will often pledge collateral to secure a loan, line of credit or other financial product. Collateral can be almost anything, including intellectual property, the goodwill of the business, fixtures, inventory, accounts receivable and bank accounts. Typically, if this is done, the creditor will file a UCC-1 financing statement with the Secretary of State where the business is registered. Determining what UCC-1 financing statements have been filed against your business is the first step in addressing it.

The Uniform Commercial Code, or UCC, is a set of laws that deals with commercial transactions. It has been adopted by most states. A UCC-1 financing statement is the way a creditor files a notice that it may have an interest in a borrower’s property - in this case, your business. If the notice is properly filed (in your state that usually means at the Secretary of State’s office), the creditor will usually have superior rights over any other party that later claims an interest in the same property. That other party may be a later creditor, or even someone who innocently buys the property. So, the day the creditor filed its UCC-1 or lien matters: it has the legal right to recover the property that it has an interest in ahead of anyone who comes later.

Business owners are often mystified by what they find on file against their business. UCC filings and liens are more common than you might think. Just because you pay off a debt does not mean that the UCC-1 (financing statement) or lien was removed. And if the business fails to pay some of its taxes, such as income, sales, gross receipts or license fees, the taxing entity can file a lien on all of the business’s assets, without the business owner’s knowledge, and the business can continue to operate just as before. Do not depend on your memory or your records.

UCC Records

The first place to search is the Secretary of State’s office where your business is registered. Look at its UCC records. Search for the exact name of your business. Then search for the name of each owner, including you, because filings can be made against the individual owners as well as against the company.

The second step is a lien search. This is almost exactly like the UCC search, except that it’s done at the county level where the company, or its real estate, actually lives. As with the UCC search, search under the names of the owners as well as the company. Deciding which counties to search can get a little complicated. First, you should search all counties where the company owns real property. You should also search the county where the company’s physical address is listed on its state registration. You should search any county where any of the owners have a primary residence. And if any owner has moved at any time within a range you think is significant (usually a five-year window), you should also search the county or counties of the former residence as well.

When you get the results back, go through them and look at each item with the debts you know you have in mind. A filing that was for a loan you paid off may still be on there. A tax lien that you never knew about may show up. Each one tells you who might have a claim to what asset, and it tells you by the date on it who would normally get paid first.

A Smart Buyer Will Run a UCC Search

Why does this matter to you? The value of your business is probably tied to its assets. If you ever sell your business or its assets, a smart buyer will run a UCC search and a lien search, as part of due diligence, because that’s what the law assumes they’ll do. A buyer who finds a filing may walk away, or at least want it priced into the deal. Anyone who doesn’t run these searches could be buying assets that another party could later take. It is better that you find the filings first.

If you were shopping for a house, you’d put months into finding just the right one. Then you’d dig up what you could on the neighborhood, the renovations, what similar houses were selling for, all to make sure you weren’t paying more than you should for the place. Then just as you were about to make an offer, you find out that the seller has promised the light fixtures to someone else already. That might just kill the deal. At the very least, it changes the price. Someone buying your business will feel the same way about assets already promised to a creditor.

The search does not tell you about filings that will occur in the future; it only tells you what has been filed as of the day you run the search. If you’re selling the company, don’t wait too long between when you run the searches and when you close the sale, because in that time a new filing might come in between the two events. And don’t rely on anyone else’s word that all the records are clear. There might be liens that no one knows about. If you do have filings on any of the assets you’re selling, those filings need to be cleared prior to closing, or money will have to be held back in escrow to cover the assets that are subject to the lien.

Like any other big financial decision, get a good lawyer, a CPA and a banker. This is not the time to pinch pennies. A mistake could mean losing your entire investment–and more.

If you want to find out if there’s a UCC lien on your business, you need to search the UCC records at the Secretary of State and the county lien records, under the name of the business and the names of its owners. Yes, it takes time, but it’s a lot better to know what’s on there now, when you get to look at it, than to get a call from a buyer later.