If you’re borrowing against your business assets, then you’re going to hear the term UCC-1. Let’s go into more detail to get a better understanding of what a UCC-1 form is, why it is used, and how it affects you.
Uniform Commercial Code
First, a bit of explanation. The Uniform Commercial Code, or UCC, is a set of rules for business commerce that all 50 states and territories have agreed to abide by. The idea is, business transactions should be handled exactly the same way in all 50 states, so that interstate commerce flows easily. A UCC-1 is a ”financing statement” that a lender files to perfect its security interest in collateral. It establishes the priority of creditors if the borrower defaults on the loan, or even files bankruptcy. Every lender in the US uses the same form; it’s public notice of their claim on some or all of the company’s assets.
The UCC-1 form is filed with the secretary of state in the state where the business is located; sometimes in more than one state (if, say, the business is right on the border, or has locations in more than one state). Everything on the form is public record, and many states let you search online for a small fee. Because the filing is public, anyone who wants to lend money to a company, and therefore put their own assets at risk, can easily check to see if there are any existing claims against the company’s property, equipment or inventory.
Being First in Line Matters
And that is exactly what happens: before a lender makes a secured loan, they search for any prior liens filed against that collateral. If there are multiple filings on the same collateral, the one with the earliest filing time stamp at the secretary of state will be the first lien. Being first in line matters because it means the first creditor in line has the best chance of recovering money if the borrower defaults or files for bankruptcy. Most lenders want to be in first position (unless you negotiate otherwise ahead of time).
The UCC-1 filing can be on a specific asset, like a piece of equipment with a serial number, or ”blanket” which means the entire company’s collateral. With a specific filing, the lender just has a security interest in a single piece of equipment, nothing else. But, if the creditor files a “blanket” lien, and it takes priority, then the creditor has a claim on everything the company has put up. So a blanket UCC-1 is a big deal. It means if another lender comes along, they will have to take a subordinate position, behind the first lender.
To take one example: The SBA routinely requires a blanket lien; which means that receivables are included — which means that a second lender can’t help the company with working capital. SBA loans only allow a small amount for working capital, so owners often end up with long-term assets financed but short on working capital. The SBA would have to subordinate on the receivables so the second lender could take first position on that asset. Getting that subordination can be a slow and frustrating process.
If you know you’ll need both long-term assets (equipment, etc.) and working capital, negotiate both loans upfront, and make sure both lenders are comfortable with each other. Don’t sign one deal, and then try and make it work later.
Don’t Give the Lender Permission to File
The borrower does NOT need to sign a UCC-1 filing. Some lenders put language in the fine print of the application, which is signed by one of the company officers, allowing the lender to file the UCC-1 filing. Then, if the business does not use that lender, it may pay fees to get it released. Read the small print and don’t give the lender permission to file until you have committed to using them.
The UCC-1 can be assigned or amended if the loan is sold or the lender is acquired by another lender. The filing often lists the corporate name, the d/b/a, and the primary guarantor. In the case of a parent company, the UCC-1 can include all the subsidiaries.
Finally, if the loan is paid off, it is the borrower’s job to ask the lender to terminate. It is important to do it right away. Often, lender mergers will lose the records. It can often take a long time to get the new lender to locate and terminate an old “orphan” UCC. So, get your paid-off UCC terminated as soon as you can. Do not assume that your old lender will do it for you.
The takeaway here is to make sure you understand the ramifications of each UCC-1 filing upfront.
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.
