Every business that extends credit to customers should have a way to file a UCC financing statement. Let’s start with the basics.
The Uniform Commercial Code came along in 1952. Its job is to standardize rules for sales and other commercial dealings across the country, and it gets into a select range of topics.
The UCC contains ten sections in total:
- Sales
- Leases
- Documents of Title
- Investment Securities
- Negotiable Instruments
- Letters of Credit
- Funds Transfers
- Bank Deposits and Collections
- Bulk Transfers and Sales
- Secured Transactions
UCC-1 Financing Statement
As you likely guessed, UCC filings are in the “secured transactions” space. One UCC form is known as a UCC-1 or just a UCC-1 financing statement. It serves as public notice of an outstanding lien on a specific asset, belonging to a specific debtor. If the debtor defaults or goes bankrupt, this protects the lender. The lender can liquidate the collateral if the debt isn’t repaid.
The UCC-1 is filed in the office of the Secretary of State in the debtor’s home state or state of incorporation. Nearly every Secretary of State office has the forms online. Once the Secretary of State accepts the filing, it is official. It is fairly simple.
You have to provide three things: names and addresses of debtor and creditor and a description of the collateral.
- Debtor’s legal name and address
- Creditor’s name and address
- Collateral description
Once it’s accepted, the filing remains in effect for five years. If you don’t renew it, it will lapse.
UCC Search
Before you extend credit, you ought to check whether a UCC lien already exists on the collateral. To do this, you simply run a UCC search on the Secretary of State website for the state of residence or incorporation of the business. As you may have surmised, many states allow you to search filings online.
Your search must use the debtor’s correct legal name. It’s essential. Also, search former names, as active filings may be recorded under them.
If liens already exist on the collateral, you must decide whether extending credit is worth the risk. The earliest-filed UCC-1 gets top priority, and later filers have to stand in line behind them. Some prominent lenders, names you recognize, will refuse to take a spot behind another lender’s filing.
Most debtors genuinely intend to repay. But unexpected events can throw them off track, and a lender without protection could lose some or all of the collateral.
If the debtor fails to pay or goes bankrupt, the UCC-1 puts you in a secured position. That gives you a place in line when the debtor’s collateral is divided up.
If you aren’t sure where the company is incorporated for your UCC search, a few steps will sort that out.
- Start with their headquarters address.
- Go to the state’s Secretary of State website and run a search for the business name.
- Results should show the state of incorporation.
There’s another way to go, a nationwide UCC search, offered by a few online companies. You can pay a fee to have this done for you.
A secured creditor stands near the front when a debtor goes bust, with only government entities like the IRS ahead of them. That means a much better shot at recovering at least part of a debt. A creditor who never filed a UCC-1 is unsecured and ends up at the back when a debtor defaults.
The debtor’s Secretary of State means the state of residence for individuals and the state of incorporation or organization for businesses. If the collateral is real property, it is wise to record the UCC-1 with the recorder in the property’s county as well.
Most secretary of state websites have the UCC-1 Financing Statement form available for download, with instructions, too.
A national UCC-1 form is available to download, but the filing state may require its own form. Use the state’s form whenever you can, follow its instructions, and be sure to get the debtor’s legal name and address exact. The creditor’s name and address have to be correct, too.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
