If a lender has placed a UCC filing on your company, it means you have pledged specific or certain assets as collateral to the lender. The UCC filing can give a lender a lien over all or specific assets of a business. UCC filings are common in small-business lending, but for an owner who is already behind on payments, the UCC-1 is usually not great news. Here are eight ways it can hurt you, and two ways it doesn’t.
Access to Future Credit
First, it can stop you from borrowing more. Most small businesses have only a few assets to offer as collateral, and if one lender holds a blanket lien, they have a hold on all your business assets, not just particular ones. This will make it tough for other lenders to give you a loan. You can lose potential lenders because they know you already have a lender who has the first claim on the collateral. The UCC lien is a deal-breaker for some lenders. So you may have to pay off that lien or hope to get it removed or have it replaced before a lender will make you an offer. You could ask the first lender for a carve-out, a release of some assets from the blanket lien, but this is unlikely to happen.
Second, it pushes every later lender to the back of the line. The first lender to file holds a first-position lien, and anyone who lends after it can only take a second-position lien. Then the second lender would have a claim on the assets, too, but the first lender’s claim takes priority. With limited assets as collateral and two lenders’ claims on them, few lenders would take the risk. Lenders typically won’t let you reuse the same collateral, and borrowing from several at once spreads your assets across more creditors who can claim them.
Third, the lien sits on your business credit report. Your business credit report is separate from your personal credit report but it still matters to the lenders who read it. It displays any UCC liens from the last five years, including information about the status of the lien, collections or disputed amounts.
Fourth, the loan behind the lien raises your credit utilization ratio. Your credit utilization is the percentage of the money you owe to lenders compared to the money that you can borrow. If the ratio gets too high, it could negatively affect your credit score. A negative score, in turn, can affect your access to future credit.
Pledged Collateral
Fifth, it puts what you pledged on the line. The collateral you designated, whether a new machine, a vehicle, inventory or receivables, is at risk if you default on your loan. A lender who holds a UCC-1 can go after the pledged collateral to satisfy a default. If you fall behind, they can take it, sell it, and keep the proceeds.
Sixth, a blanket lien widens that risk to everything. A lien against specific collateral covers one or more identified assets, like the equipment or inventory you financed. A blanket lien, on the other hand, gives the lender access to any of your business’s assets as collateral in the event of a loan default. So if you have a blanket UCC filing, the lender can sue for all of your business assets if you default on the loan.
Seventh, the filing is a public record. Anyone can search for it. What’s more, it shows other potential creditors exactly which of your assets are already pledged. A UCC lien indicates an unpaid debt to a lender, which might be a red flag for other potential lenders when it comes to performing their due diligence.
Eighth, the lien doesn’t go away on its own when you pay off the loan. Lenders don’t automatically remove a UCC filing. You need to ask for it. Many borrowers may believe that once a debt is repaid, lenders will automatically remove the lien. But that is not how it works. If you pay off the loan, make sure the lender files a “UCC-3 termination” to show that the UCC-1 no longer applies. Otherwise, it stays in place for five years unless a renewal is filed or it is terminated, and until then it can make it hard to qualify for other loans even after the debt is repaid.
Having a UCC-1 Isn’t Always a Bad Thing
At least there’s some good news. First, the existence of a UCC lien won’t hurt your credit score unless you’ve defaulted on the loan or it has gone to collections. When a lender “files a UCC,” that doesn’t mean you have defaulted on a loan. Remember, the lender’s UCC-1 filing gives them a claim to your assets as collateral. That does not mean they will actually go after your assets right away.
The second way it doesn’t hurt is that a filing is just a record. It’s simply a way to identify collateral. It indicates that a lender has rights to certain assets until a loan is repaid, and it will also show if that loan has been repaid. In other words, having a UCC-1 isn’t always a bad thing. Clearing it is easy: ask for the UCC-3 with your final payment and confirm that the lender filed it.
If you’re struggling and there’s a UCC-1 on file against your company, the worst thing you can do is look the other way. It’s worth understanding how and when the filing occurred, whether it’s still active and how it could impact your credit score or ability to access future financing. Start with your state’s secretary of state website to see what’s on file. If you have multiple collateral arrangements, then you could also try to understand each separate UCC filing. The cleanest fix is to pay off the first lender and get them to remove the UCC. This is likely out of the question for most small businesses that are behind on their payments. The good news is that UCC-1s can be removed, but it’s important to know exactly what each lender can lay claim to in advance so that you can decide how to proceed.
