You apply for new financing, the lender seems interested, and then everything slows down. The underwriter has run a lien search and found a UCC-1 filed against your business. The UCC is an alert that requires an investigation. When a UCC is in the background, the lender has to address the issue, make sure all the details are clear, and sometimes re-underwrite the application. A UCC can make or break an application, but it doesn’t have to be a catastrophe. Here is what the filing is, and how it can affect your ability to borrow.
UCC-1 Financing Statement
A UCC lien is filed under the Uniform Commercial Code, a model law that helps streamline commercial transactions across the 50 states. The filing itself is a UCC-1 financing statement, recorded with the Secretary of State. It’s a notice (like a public announcement) that somebody (the “secured party”) has a claim on some or all of your business assets. Your funder, not you, files a UCC lien when they give you financing that involves collateral.
The UCC-3 is an amendment to the UCC-1. A UCC-3 can be used to remove (terminate) a UCC-1, transfer it to another party, or continue it for more time. Less common is the UCC-5. A UCC-5 is a correction notice if an earlier filing was inaccurate or improper. The UCC-1 (and any UCC-3 changes) are public records anyone can see.
Lenders Want to Be First in Line
That public record is the point. Say you get financing from Creditor A, put up your inventory, equipment or receivables as collateral, and Creditor A files a UCC-1. That means any new creditor can see it. If Creditor A has your pledge in first position, Creditor B can only accept those same assets if they agree to take second position. Lenders want to be first in line. Think of your assets as a row of lockers. The first locker gets a padlock from Creditor A (first position). When Creditor B wants to use the same locker, it must agree to put its padlock behind Creditor A’s padlock (second position). If the UCC-1 lists particular lockers (specific inventory, equipment, etc.), those are the ones Creditor B must respect. If it’s a ”blanket” UCC-1, it’s a claim on every locker the business owns. A blanket lien is the equivalent of dragging a vacuum across your entire business to grab anything it can get. When a loan is made with a blanket lien, any other creditor who wants to make a loan to the company will have to compete with the blanket creditor.
UCC filings are good for five years, though they can be terminated sooner or continued, depending on the agreement between you and the creditor. That matters, because the new lender wants to know how long this lien will be in place.
Knowing which creditors have liens against the business is important to avoid surprises when dealing with new financing partners. Before a creditor approves you, it will run a lien search. A UCC-1 lien is an alert to the lender you’re approaching that another lender may have an interest in the assets you have pledged as collateral. The lien means that the asset may not be available as your exclusive collateral. If there’s an active UCC-1 on the business, the lender may delay the financing, negotiate with the other creditor(s) to determine the seniority of the new financing, or decline the financing. This will depend on what collateral each creditor has an interest in. This is one of those “it depends” answers. But new lending may still be possible depending on what the lien attaches to and to whom.
UCC filings tend to surface and sting when a business owner is struggling to make payments. If the debt behind the filing is what is holding you back, you need a plan to clear the claim, whether by negotiating with the creditor yourself or having someone do it for you. That is where a business debt settlement company like ours steps in: at Delancey Street, our senior advisors negotiate with funders and lenders for less than the full balance owed, and we do not sell you another loan.
How a Filing Can Be Limited
The best time to protect your future borrowing, though, is before you sign. Before you let any creditor file a UCC-1, ask: What is the collateral that will be covered by the filing and under what conditions will it be terminated? As business owners we should also know what our collateral is that is securing the existing UCC’s, and the terms and conditions for termination of any filing. Once you understand how a UCC works, and what the risks are to your business, you can manage the process more effectively.
Invoice factoring shows how a filing can be limited. With factoring, a UCC filing is standard and expected. A UCC filing is the factoring company’s way of saying, “We have a claim on these specific assets - your unpaid invoices and related receivables.” A UCC filing is just a way of putting other people on notice that specific assets are being financed; it doesn’t mean you are losing something. When a factoring agreement is structured that way, the UCC only secures the invoices and related assets, so your equipment, vehicles and other assets remain unencumbered. That helps preserve your ability to finance equipment purchases or leases with other lenders. The UCC will show up on a business credit report (Experian Business, D&B). Factoring provides immediate cash from invoices you have already earned, which you can use to cover payroll, expenses and pay down current liabilities.
The impact of a UCC-1 lien on loans and merchant cash advances can break or make deals. If you are behind on the debt tied to one and unsure whether to negotiate, settle or file for bankruptcy, a first consultation with us is free and confidential, and if a cheaper option exists, or bankruptcy counsel is the better path, we will tell you so on the first call.
