When it comes to business financing, it can be a very wide world. So it’s not uncommon to sign the paperwork to a loan without realizing that you agreed to a Uniform Commercial Code (UCC) filing. Plenty of owners only find out when the lien turns up on a business credit report. If it does show up on your credit reports, this is alarming for a business owner whose loan may have been paid off years ago. So, how can a loan be paid off and the lien still remain? And what does it communicate to anyone reading it?
The Uniform Commercial Code (UCC) is a comprehensive set of laws governing business transactions in the United States. A Uniform Commercial Code (UCC) financing statement is a legal document used by lenders to establish their right to a company’s assets as collateral for a business loan. You may also hear it referred to as a UCC-1 filing. It’s a document filed with a state’s Secretary of State, and it establishes that a lender has the right to claim those assets if you default, until the loan is repaid and the lien is removed. Lenders file UCCs when they want to have some protection in case you default on the loan.
Here’s the thing: not all UCC filings are “bad,” per se. Most business financing is secured with collateral, and there is plenty of UCC financing out there and it is a normal part of life for small businesses. What matters is what the lien covers. A blanket lien means the creditor has a claim to everything your business owns, not just one specific asset. Many small business loans require one, including SBA loans and short-term loans. A specific collateral lien limits the lender’s claim to certain assets, such as a vehicle, real estate, invoices, inventory or equipment. Finance a business vehicle that way and, if you don’t repay, the lender can seize the vehicle but can’t touch your other business assets.
Your Business Credit Score
Once the UCC-1 is filed, the lien starts appearing in public record searches and on your credit reports. In plain terms, it’s a way of alerting other potential creditors, or parties, that you owe money, to whom, and the current state of the debt. While a UCC filing probably won’t appear on your personal credit report, it can show up on your business credit report.
If you haven’t defaulted on your loan, a UCC filing should not have a major impact on your business credit score. That doesn’t mean you should ignore it, however. But it can impact your ability to get additional credit. If you have a UCC filed on your business, you may not be able to access financing with another lender, even if your loan is in good standing. Many lenders do not want to take a position beneath someone who has a blanket UCC on your business. For example, if you were to borrow money from two different banks, Bank A and Bank B, the second bank would likely not want to make you a loan if Bank A already had a lien on your assets. If you have separate collateral to secure a second loan, this may not be a problem.
What happens when the loan goes unpaid? It’s a mark against your credit score if the loan goes into default. Lenders can enforce their UCC lien and start to repossess business assets if a borrower falls behind on payments and does not repay the debt within the agreed term. However, the lender does not have the right to simply go and take business assets without the due process of a lawsuit. It has to take you to court and win a judgment against you, and that judgment damages your credit score too. In some cases a lender decides enforcement is not worth the effort, but your credit will still take a hit from a UCC lien on an unpaid loan.
If you are already behind, there is another path. Instead of paying it off right away or letting a court force the sale of your property, you can talk to the lender and try to reach a private agreement to pay what you owe. That is the conversation a business debt settlement company like Delancey Street has with funders and lenders on an owner’s behalf. Our senior advisors negotiate for less than the full balance owed, and we do not sell you another loan.
Do UCC filings expire? In short, yes, unless they’re renewed. A UCC lien has a set term: 5 years, typically. Once it expires, it will not show up in your business credit searches any longer and it won’t hurt your credit capacity. If you haven’t paid off the debt when that happens, the lender can refile a renewal lien.
UCC Search
To see what is on file against your business, start with your secretary of state. Most states keep a searchable directory of UCC filings online. You’ll usually find an online search tool or database. Just search by name or file number, or find it in the list. If you find a filing and want more detail, you can usually order a full report. If it is a lien on real property, you may have to check with your local county clerk instead. Not every county will have full online records, so you may need to visit in person. When government sites fail you, you can use a commercial UCC search service to run a comprehensive search for a fee. This comes in handy if you have liens in multiple jurisdictions. You can also check your business credit report for an active UCC filing. You may not see every detail of the filing there, but it is worth monitoring your reports with Dun & Bradstreet, Experian and Equifax regularly.
Getting Rid of a Lien
Paying off the underlying debt is the first step in getting rid of a lien. Once a business loan is repaid, the creditor should release the UCC lien by filing a UCC-3 form. If you don’t see a UCC release, don’t assume you can ignore it. It may just mean the creditor has forgotten. Many lenders won’t automatically file a UCC-3 when you pay off a loan, so you may need to ask. Get in touch with the original lender. And if the lender won’t file? You can contact your secretary of state and request a termination statement. If the terminated filing is still appearing on your business credit report, you can file a dispute with the credit bureau to remove it.
When people see a UCC on their business credit report, they may panic and assume it is an immediate problem, that it cannot be solved. That may not be the case, depending on the status of your loan and other circumstances. If the loan behind the lien is what’s keeping you up at night, a first consultation with Delancey Street is free and confidential, and if a cheaper option exists or bankruptcy counsel is the better route, we will tell you on the first call.
