Say you took revenue-based financing from Clearco or Wayflyer, and your sales have tanked. You haven’t been able to keep up with the payments, and the payments hurt. So how can you negotiate with the funder? One important piece of information is the Uniform Commercial Code (UCC) filing. You can try to negotiate, but understand that filing before you make an offer, because it plays a big role in how negotiations go. And that knowledge makes your negotiation more convincing.
A UCC filing is a way for a creditor to provide “public notice” of its interest in the debtor’s personal property. These filings are common with revenue-based financing. Some companies don’t even call them loans. They call them advances or something similar. These filings are designed to make a creditor’s claim public, which serves as notice to other creditors.
Here’s why that matters: not all creditors are alike. Some are secured, and some are unsecured. Filing a UCC-1 is part of what makes the creditor’s claim “perfected.” But generally speaking, a perfected claim is one that’s secure. A perfected secured creditor who’s not repaid will get to collect on its debt before other creditors. In other words, secured creditors are afforded more rights in the eyes of the law than unsecured creditors. A creditor that never filed has to wait until the secured creditors have collected. And that’s where this all applies to negotiations. Knowing a UCC filing was made, and where it was filed, helps a debtor gauge the other party’s leverage.
Not all UCC filings are the same, though. There are two main types, and knowing which you have is really important. Here’s the thing: you might not know which type you have until you read the documents related to your financing agreement. A blanket lien isn’t specific; it covers all property, in all locations, everywhere, rather than focusing on one area. Other filings reach only specific collateral, such as receivables. When you know what type you have, it’s easier to estimate how much leverage the creditor really has. Clearco, for its part, says that it does not file all-asset liens on your inventory, equipment, IP or other business assets, and that its UCCs are business-level only, with no personal guarantees. For Wayflyer or any other funder, don’t assume anything; your own agreement is where the answer is. The filing does affect negotiations. That’s why you should read the filing and know what its reach is.
Even if the filing never touches your day-to-day operations, it might limit your flexibility. A UCC-1 shows up on your business credit report and can raise your credit utilization ratio, which may hurt your score. Other lenders will see the filing, which can limit their willingness to work with you. They may not want to get in at the back of the line behind a secured creditor. You might not care, but a future lender might.
Take a simple example. Say you sell housewares and furniture online, and a local bank works with you to get a working capital line of credit for your business. To get the bank to extend credit, it demands a blanket UCC lien on your inventory, equipment, and intellectual property (IP). This puts the bank ahead of other creditors. Then sales turn. The market for housewares and furniture is sluggish. Your inventory isn’t selling and you’re over-stocked. With little credit history and few other assets to pledge, a fledgling business might find it hard to find more working capital. And a floating lien can even be enough justification for a supplier to cut off deliveries if an invoice isn’t paid.
A UCC filing on its own is not a disaster. It doesn’t mean the end of the world. With knowledge and a calm head, you can negotiate. It’s just a notice of a security interest. So don’t panic. It’s part of a world in which debts are arranged with some degree of “public notice” so that creditors can compare leverage.
What Has Been Filed Against Your Business
So how do you find out what has been filed against your business? Start with the agreements you signed, looking for any mention of UCC filings or security interests, collateral descriptions, or UCC financing statements and amendments. Next, run a search by checking the Secretary of State’s filing system. Use the UCC division’s site in the state where your business is incorporated or where your assets are located, and search your business name. Then ask the financing party, in writing, to identify any filed UCCs and where they’ve been filed. None of this changes what you owe. But knowing can help you figure out your next move.
It also helps to know that UCC filings are not permanent. A filing expires five years after it was filed unless it is extended within six months of the expiration date, and a UCC expiration means that it’s no longer effective, and the creditor loses the benefit of having filed to claim an interest in assets. Once you have finished paying a creditor, you can also take steps to have the filing removed before the five years are up. The point is that UCC filings can be limited in time and scope. That matters in negotiations. A creditor may have told you that it does have a UCC filed against you for good reason, but don’t let that be the end of the discussion.
When you do sit down to talk, start with the basics. Ask your lender what is actually filed. Then ask when the lien will be removed, and whether it will be removed once your payments are complete. Just knowing what they have and where they have it is leverage, but knowing more is better. After that, ask for reduced payments or an extension. The reasoning goes something like this: “I’m going to lose my business if I can’t pay this debt, and if I go out of business I can’t pay you. Can we reduce the payment so that I can pay you in full?” If the creditor is reasonable and believes the debtor will be able to fulfill the terms of the amended agreement, it might be willing to agree to lower payments or to extend the terms of the agreement. Remember, too, that a UCC does not give the funder operational control of your business. That might sound like a nuance, but in any negotiation, details matter. So read the documents and be armed for the negotiation.
Whatever deal you reach, think beyond the next few weeks. It can be tempting to opt for a low short-term payment, but what’s that going to mean for you 30 days from now? What about 30 months from now? The lender might not care that it is a temporary fix, but it matters to you. A future lender will also see your UCC filings and the status of your existing debts, and can use that information to adjust their terms with you. Negotiate not only for the short term, but for long term, too. It is worth mapping out your capital needs for the next 12 to 24 months before you agree to anything. Make sure the solution addresses the long-term health of your business.
So, can you negotiate? Yes, but don’t expect an easy win. Either party could kill the deal. But the filing is not the end of the story. Knowing where the filing is made, the reach of the lien, and even its expiration can be very helpful to you. At the end of the day, a negotiated deal can be a lot easier than fighting. Read the documents. Do your research. But know that you have options.
