When small business owners default on a loan or two, they often hear about the existence of a UCC lien against their business but are not sure what to do about it. A UCC lien is a common legal tool in the world of business finance. It is used to secure repayment of a loan. When you take out a secured loan, the lender usually files a form called a UCC-1 financing statement. In essence, it is a filing with the secretary of state that puts the world on notice that the lender has a legal interest (called a security interest) in the borrower’s assets. If the borrower does not repay the loan, the lender can seize the collateral and recover some or all of the loan amount.
UCC stands for Uniform Commercial Code, which is a set of rules that govern all kinds of commercial transactions. Technically it isn’t a law. It’s a list of templates that states can adopt. But all 50 states have done so, along with the District of Columbia, Puerto Rico and the U.S. Virgin Islands. Since they’re all based on one model, the rules don’t vary much from state to state.
The lender typically files the UCC-1 as soon as the loan is made, with the secretary of state’s office in the state where the borrower lives or where the business is incorporated or organized. In some cases it is filed at the county level too, in the county where equipment or other physical collateral sits. The form identifies the lender, the borrower and the collateral. The filing puts lenders, customers and other people on notice that your business has assets that are encumbered.
Timing matters when more than one lender is involved. The lender who files its UCC-1 first gets first dibs on the collateral. When you run into trouble and can’t pay, the two creditors look to the UCC-1 forms to see who they’re up against. They figure out who filed their UCC-1 first and then who filed second. A second-position lender steps into a position behind the first-lien holder. If the senior lender’s interest is paid in full and the collateral has more value, then the junior lender gets the remainder.
There are two basic kinds of UCC liens. The first is a lien against specific collateral, where the lender gets a piece of a specific business asset, such as equipment. If the lender places a lien on equipment, they are saying “If our debtor does not pay the debt, this piece of equipment that we have given them money against can be repossessed and used to recover their loan.” The second is a blanket lien, which means the lender has a security interest in all the assets of the borrower. In the case of a blanket lien, the lender is saying “If our debtor does not pay the debt, all of their assets can be repossessed and used to recover their loan.” Lenders like a blanket lien because it gives them maximum protection. You’ll see them on bank loans, loans from alternative lenders and SBA-guaranteed loans.
That becomes a real problem the moment you try to borrow again. If the lender has a blanket UCC-1 lien on all your assets, any other lender who wants to secure its loan against your assets will be second, third, or worse. Few lenders want to lend second or third, which means your ability to find more debt capital is greatly reduced. But blanket liens don’t have to be all or nothing. You can ask the lender to “carve out” certain assets. Carving out certain assets simply means a lender agrees to remove certain assets from the scope of its blanket lien. Getting a lender to agree to that is rare, though. The other option is to refinance: take out a new loan with a new lender to pay off the old one. It’s hard to pull off, but that would be better than accepting a second lien.
What about your credit? Your business credit report will show UCC liens from the past five years. While defaulting on a loan is bad, having a UCC lien is not bad. The lien itself won’t hurt your score unless you default on the underlying loan or the debt goes to collection, though the loan does add to your credit utilization. If a secured loan is negatively affecting your credit, then it is probably because you are not making payments. If you default, the lender can take the collateral and sell it. With a blanket lien, the lender can sue for all of the company’s assets.
Do UCC lien notices ever go away? Yes. After five years, if the loan is still outstanding, the lender must file to renew the UCC-1 lien. If the lender does not do that, the lien lapses. At that point, there’s no more lien against the collateral. Paying off the loan doesn’t clear the filing automatically, though, because lenders rarely terminate a UCC-1 unless asked. After you pay the loan, ask the lender to submit a UCC-3 termination form to remove the lien, and get confirmation that it was filed.
Where can I find my business’s UCC liens? It is a public record and any lender can go online and search for your business’s filings. Every state’s secretary of state website has a search function. You may have to pay a fee.
Talk with the Lender
If you’re already behind on payments, the best thing you can do is talk with the lender. They already have a lien against your assets. If the lender doesn’t want to talk about modifying your loan, then there’s a real risk the collateral will be seized. So make a plan to get back on track. Whatever you do, don’t ignore it.
