How do UCC filings and tax liens affect my small business getting a loan?

Are you a small business owner considering applying for a loan? If so, it’s important to understand the concept of liens. When you’re seeking financing for your business, liens can play a significant role in the approval process.

This guide will walk you through everything you need to know about liens, including why they matter, the different types, and how to search for them.

A lien is a legal claim against assets. A lender files a lien on a borrower’s asset, or collateral, as a way of ensuring they will get the money they’re owed.

But a lien doesn’t move the assets. They stay with you. You keep control of them, using them as long as you keep repaying the lender, whatever your agreement is. If you default, the lender can take them in order to recoup their losses.

For example, if you get a business loan to purchase new equipment, the lender files a lien against your business assets. This tells anyone interested in your state that if you default, the lender might seize some or all of your business assets.

Kinds of Liens

Liens can be placed on all types of things, both personal and business. There are many kinds of liens, but for a small business like yours, two of them are the most common.

The first is called the Universal Commercial Code (UCC) lien. Often referred to simply as a UCC filing, a UCC is what lenders file on collateral you pledge for a business loan. UCC filings show other potential lenders what collateral is being pledged for a business loan and at what position they would hold the lien on that collateral.

There are two kinds of UCC filings.

A specific collateral lien gives the lender the right to obtain possession of only the specific assets named. For instance, a lender might file a lien against a piece of equipment.

A blanket lien is a lien placed on a business and ALL of its assets.

The second most common type of lien is the tax lien. The IRS or a state tax agency can place a lien on your property due to unpaid tax bills, such as income taxes or sales tax. This can last until you pay the balance due, including all fees and penalties.

What Does This Mean for My Business

You might be wondering, “Okay, so what does this mean for my business?” Good question. Both UCC liens and tax liens impact a business differently.

What about UCC liens? If you’ve borrowed from a bank or alternative lender, you’ve likely got one of these liens filed against some part of your business. Most lenders require them, so they’re standard and normal, and they have no effect on your credit score, unless you default.

You can have multiple UCC liens, all filed in order. That means the first lender to file a lien has first claim to assets if you default. Having a UCC lien may cause some lenders to refuse you. Of course, not all lenders care if there is a UCC lien filed, and will work with businesses despite existing UCCs.

Unlike a UCC lien, a tax lien can seriously damage your finances.

For example, a tax lien can show up on your credit report, which can have a negative impact on your credit score.

As if that weren’t bad enough, a tax lien is public record. Anyone can look it up, so lenders can see it when they’re reviewing your application. Plus, it can hurt your chances of being approved.

Know if You Have Any Liens

Before borrowing money for your business, you should know if you have any liens. It’s easy to check. Liens are public record, so anyone can find them, and they could impact your ability to borrow. UCC liens can be searched for on your state’s website. Federal tax liens can be checked via an IRS account transcript on the IRS.gov website. Paid services, like LexisNexis search, can locate all types of tax liens at one time.

Something popped up you weren’t expecting? Here’s what to do. First, act fast. Liens take time to release. Second, confirm the lien is really yours. It might just be a mistake. Next, contact the lienholder and pay off the balance if you can. Send proof to the credit bureau and ask them to remove it. If it’s a tax lien, pay it off first. Then ask the county clerk for a Lien Satisfaction Letter.

Can’t pay the balance? Maybe you can set up regular payments to take care of it. The lienholder might be willing to confirm the payment arrangement for lenders, which can help, though there’s no guarantee.