If a lender has filed a UCC lien against your business, here is what that means. When you receive a secured loan, a lender may file a UCC-1 financing statement, a legal document that notifies the world that the lender has a right to take your collateral if you don’t pay the loan back. The document is very standard in small-business lending, so don’t panic when you see it. It doesn’t mean you’re in trouble, per se, but if you’re struggling to pay debts, it could affect you. And you’ll be dealing with it, because the lien is the thing that makes it possible for the lender to go after your stuff.
UCC stands for the Uniform Commercial Code, a set of guidelines governing commercial deals in the U.S. It’s not quite a law — it’s a model — but all 50 states and D.C., Puerto Rico and the U.S. Virgin Islands have adopted a version of it. In practice, the rules are pretty much the same no matter what state you’re in.
Record a UCC Lien
When you first borrow money, the lender will typically record a UCC lien with the secretary of state in the state where your business resides. But if the collateral is something you can see and touch—like equipment—the lender may also file a lien with the county recorder’s office where that property is located. Your UCC filing only has three elements: the name and address of the creditor, the name and address of the debtor, and a description of the collateral. Filing in the right state (where you live, or where your company is incorporated or organized) means the lender “perfects” its security interest. That’s the fancy language for saying it can enforce its lien in state court, without a lot of complications. The filing is also public record, so other lenders can easily see whether the property has been pledged.
The first lender to file a UCC-1 is the first in line to the assets if the borrower has more than one lender, so all the lenders will file their liens as soon as they can. The first to file ends up with first-position, the next with second position, and so forth. The first-position lender is generally paid back in full before the second gets anything. Occasionally lenders strike a deal to leave more for junior lienholders, but in general a lender won’t let you sign over the same collateral for multiple loans.
There are two kinds of UCC lien. One kind is a lender’s interest in specific, identified collateral, like inventory or equipment. So, it’s not a lien on everything. The other kind of UCC lien is a lender’s interest in all of your assets, inventory, equipment, accounts receivable, etc. It’s called a blanket lien, and it’s pretty common with traditional banks, alternative lenders, and SBA-guaranteed loans. Lenders like blanket liens because they believe lots of assets helps minimize their risk. Sometimes the blanket lien will carve out certain assets if the other assets are more than enough to pay the lender back.
A UCC Lien Matters in Three Ways
For a business that is already stretched, a UCC lien matters in three ways. First, a UCC lien can make it harder to borrow more. These liens usually last five years, and the lender must renew them if the loan is still outstanding. Small businesses often have few other assets to use as collateral. So most lenders won’t do more lending if you have an existing blanket lien. They don’t want to battle others over whatever assets you might have if you default. You could ask for a “carve-out” on the blanket lien to free up some collateral, but good luck. It happens very rarely.
Refinancing your existing loan with a new lender is one way to get a business loan when the old one has a blanket lien. In order to refinance, a second lender agrees to repay the old loan and get the original lender to terminate its lien, giving you a larger secured loan from the new lender. There are not a lot of lenders willing to make unsecured loans. The last resort would be finding a lender willing to accept a lien in second position. Stacking debt across lenders is not my idea of good business practice, and if you can’t repay, the lenders might seize a pretty significant chunk of your business and personal assets.
Second, the lien shows up on your credit. Your business credit report shows the details of every UCC financing statement you’ve signed in the last five years, and whether each is outstanding, in collections, or disputed. Having a lien doesn’t hurt your score unless you defaulted or the loan went into collections. But the loan behind it raises your credit utilization ratio. That can hurt your score if the ratio gets too high. So the key is to size the loan carefully, and then make the payments. If you do, the existence of a lien shouldn’t really affect your credit score.
The third effect is the one that matters most when money is tight. If the business fails to repay the debt, the pledged assets are at risk. With a blanket lien, the lender could sue to seize all of the company’s assets. Typically the secured assets are movable property – vehicles, office equipment and fixtures, investment securities, inventory, receivables and letters of credit. For example, if a loan is being taken out to purchase new machinery, the lender files a UCC-1 claim, naming the machinery as the collateral. The business and lender agree on what the collateral is before the loan agreement is signed, and the lender can take it if the business fails to repay the loan.
Check What Is Already on File
Before you apply for any new financing, check what is already on file. First go to your state’s secretary of state website, there’s a list of offices at the National Association of Secretaries of State that can direct you. You may have to pay a fee. There’s also the option of a commercial UCC search engine, such as CSC Global. Having a UCC filing isn’t necessarily bad, it just means it’s part of the public record that a lender has a security interest in your assets until it’s repaid, and whether it’s been repaid or not.
When you pay off a loan, lenders don’t take it upon themselves to file the paperwork that removes the UCC-1, it’s up to you, the borrower. Depending on your state, the statement can remain searchable in the index for up to a year after you made your final payment, marked as repaid. Ask your lender to file a UCC-3 termination statement with your last payment, and ask them to confirm they did it. Many lenders are lax about it, and a UCC-1 lapses automatically after five years, but having an active lien on your account could cause problems if you want to take out another loan.
If you’re behind on payments, remember that the filing by itself takes nothing from you. Once you default, though, the collateral specified in that filing becomes the target. If the lien is “blanket,” that could be all your business assets, because a blanket lien covers everything the business owns. So keep track of what you pledged, review what’s on file, and bring your loan current before it becomes a default situation.
