There are few topics in small business finance as inscrutable as UCC-1 filings. Many small business owners don’t think about UCC filings until they go to apply for new funding. But they determine which creditors have a legal claim to your assets and in what order, and that can have a big impact on whether you’re able to get financed in the future. This is true whether you’re working with a traditional lender, a business line of credit or an invoice factoring company. Owners needn’t know how to file one. But they need to know what the filing means. Understanding how UCC filings work can help you make informed financing decisions and safeguard your business.
UCC-1 Financing Statement
The Uniform Commercial Code is a set of laws that standardize commercial transactions across the United States. UCC filings are done by creditors, not business owners, when a financing transaction includes collateral. They are filed and recorded with the Secretary of State and are referred to as financing statements. A UCC-1 financing statement, also known as a UCC lien, is the most common type of filing that can affect small businesses. A creditor files this document when it is extending financing that involves collateral; it serves as notice that the creditor has a lien or interest in the collateral that the business put up to secure repayment. The UCC-1 is a notice to other creditors that a certain asset may have already been used to secure a debt to somebody else.
The filing is not a static instrument. The UCC-3 is simply an amendment to the original UCC-1. It’s used to terminate, assign, or extend (“continue”) the UCC-1, or to amend it. Meanwhile, the UCC-5 is an information filing. This notice filed on the public record is used to signify that an earlier filing was inaccurate, wrongfully filed, or filed by someone not authorized to file. If you believe a filing was inaccurate or wrongfully filed against your business, there may be a legal issue. We’re not a law firm. When litigation is called for, we refer the owner to a vetted independent attorney and the attorney-client relationship is between the owner and that attorney.
Think of the UCC filing as the public record of a secured financing where the borrower pledges some form of collateral. For example, say you get financing from Creditor A and you put up inventory, equipment or accounts (the personal property of the business) as collateral. Creditor A can file a UCC-1 document with the state to put the world on notice that this property is collateral. That means any other financier can look that up and see that property is already collateral, so if you go to Creditor B, you can’t put up the same property, unless Creditor B is willing to take second position behind Creditor A.
Most UCC-1 liens include specific assets as collateral, but it’s also possible for a creditor to register a blanket lien. This gives the creditor rights to ‘all assets’ of the business. A UCC filing is effective for five years. It can be terminated earlier or extended (“continued”), depending on the financing agreement between the creditor and the business.
Run a Lien Search
Be aware of any current UCC filings against your business. A creditor considering financing for your company will run a lien search. If there is an active UCC-1 on file, the result could be a delay in obtaining additional financing, negotiation between creditors, or a declined request. This is all dependent on the collateral that the creditor has a claim on. What exactly does your UCC financing statement cover? Before you let any creditor file a UCC-1, make sure you know what assets it will cover, and under what circumstances the UCC-1 will be terminated.
For owners already under debt pressure, the question changes: if you’re already behind, and if there are filings against the business, who negotiates with the creditors and funders? That is what we do: our senior advisors negotiate with funders and lenders for less than the full balance owed. We don’t sell you another loan.
Invoice Factoring
When it comes to factoring, you should always assume that a UCC filing will be included in your agreement. That’s because it’s standard - and expected - for the factoring company to file a UCC financing statement. This gives the factoring company a legal interest in the assets they are financing, generally accounts receivable. These filings are often misunderstood. In reality, UCC filings aren’t inherently limiting. They provide transparency and security for both sides by clearly showing what assets are tied to the financing. A factoring company’s filing can be as specific as covering only accounts receivable and the assets related to them, leaving equipment, vehicles and other business property free and clear. That leaves more room open for your business to access additional financing down the line, such as equipment loans and leasing. Invoice factoring is not a loan, so it does not hurt your credit score. However, UCC filings themselves will show up on a business credit report (like Experian Business or D&B).
Invoice factoring can be a tool to increase cash flow without adding debt to your balance sheet. It allows you to tap into immediate cash for the invoices you’ve earned, so you can manage payroll, expenses and pay down existing obligations faster. Over time, strong cash flow and solid financial management can help position your business to qualify for future funding.
Whatever financing your business carries, the filings behind it matter. Know which ones are filed against your business, and what assets they cover. If debt service is already putting a squeeze on operations, it might be time to talk to someone before signing anything else. Our first consultation is free and confidential. If a cheaper option exists, we say so on the first call, and when bankruptcy is the better path we route owners to bankruptcy counsel.
