You have just pulled your business credit report or applied for a business loan. You notice that someone filed a UCC lien against your business assets. What is a UCC lien? Should you worry? How will this affect your ability to get a business loan?
A UCC-1 financing statement (sometimes called a UCC-1 filing, a UCC lien, or just a UCC-1) is the form that creditors use to create a lien against a debtor’s property. Plain language: It lets the bank (or other lender) take some or all of your property if you default on the loan or go bankrupt. The form identifies the borrower, the secured party (the creditor), and the collateral.
A lien is simply an agreement between the debtor (borrower) and creditor (lender) that gives the creditor the right to seize some or all of the debtor’s property if the debtor can’t repay. If the lender wants to protect against default by putting collateral on the deal, it must complete a UCC-1 form and attach that document to the loan contract that both sides will sign.
UCC liens come in two kinds. A specific collateral lien affects one or more specific assets, which is common when you borrow money to buy real estate, equipment, or a vehicle. Your lender will list the asset as collateral in the loan agreement. If you default the lender can seize and sell that asset to recover some of the money it lent you. A blanket lien gives the creditor the right to take all the assets of the business. It sounds ominous, but it rarely covers every asset under the sun. Most creditors list the specific types of assets in the “collateral” section, such as real estate, office equipment, vehicles, inventory, accounts receivable, and investment securities.
Before the UCC, states had wildly different rules when it came to commercial sales, leases and financing arrangements. The problem was that borrowers could use the same asset as collateral for as many loans as they wanted, and a lender had no way of knowing if it was already pledged somewhere else. The Uniform Commercial Code is a set of laws adopted by most states so that lenders and borrowers from different states have legal protection. The lender files the UCC-1 with the state. This puts the lien on public record, usually with the Secretary of State. It’s sometimes called ”perfecting” your security interest. It means that any lender you approach can do a search on your business and see the lien and the collateral it’s attached to before agreeing to lend you the money.
Is having a UCC lien on your business a bad thing? Not really. It’s a normal part of any business loan that requires collateral, and it restricts you only very slightly. It prevents you from pledging those same assets as collateral for another loan. For an owner who needs fresh money, though, that one restriction is the whole story. Lenders search for UCC filings before agreeing to make a loan. If they find a UCC lien, that tells them another lender has a claim on certain assets. As long as an asset has a UCC lien, you can’t sell it, transfer it, or use it as collateral for another loan — which is why lenders are less likely to offer financing. Because a lien is a public record, any new lender will see that the business owes somebody else money secured by its assets. Since those assets can’t be pledged as collateral for the new lender’s loan, the lender may well conclude it’s not worth the risk. And even if it’s an old lien that a careless lender forgot to terminate, the effect is the same.
If the lien comes from a debt you are already struggling to pay, more borrowing may not be the answer anyway. At Delancey Street, our senior advisors negotiate with funders and lenders for less than the full balance owed. We don’t sell you another loan.
Personal Assets
What happens if you default on a loan depends on your state’s laws. In most states, lenders can’t take a borrower’s personal assets. They usually have to sue the borrower first. If the borrower put his or her personal assets up as collateral in a UCC-1 filing, however, those protections go out the window. The creditor could immediately go after cash in the bank account, the vehicle, or any other assets listed in the UCC-1.
In most states, you can still protect a small percentage of your personal assets even if your business has an active UCC lien. State rules typically let you keep a small amount of home equity, one car, retirement accounts, and business equipment. If you’re concerned about defaulting on your business debt, see a lawyer with expertise in asset protection. We at Delancey Street are not a law firm. When litigation or bankruptcy is the best solution, we refer the owner to a vetted, independent lawyer. The client-attorney relationship will be between the business owner and that attorney.
File a UCC-3 Form to Terminate the Lien
Suppose you pay off a loan. The lender should file a UCC-3 form to terminate the lien on your asset. But sometimes a lender forgets even when the loan is fully paid off. UCC-1 filings stay active for five years whether or not the loan has been repaid, so if the lien is never terminated, other lenders will see it and be reluctant to lend to you.
Finding out if a UCC-1 filing was made against you is surprisingly simple. Go to the National Association of Secretaries of State (NASS) web site. Choose your state and you’ll be directed to your state’s UCC filing portal. Check before applying for your next business loan. If you find an outstanding UCC-1 on a loan you already paid off, contact the lender and ask them to file a UCC-3 to remove the lien. If they don’t, you may need to call a lawyer.
And if the lien traces back to debt you can no longer carry, talk to us before you sign anything new. Our first consultation is always free and confidential. If we decide you can’t win your case, or if we think a less expensive option makes more sense, we let you know during that first call.
