One of the most frustrating events for a business owner to encounter is when they find out that their MCA funder filed a UCC lien before they missed a payment. Often it only comes to light when the owner applies for new financing. Usually the lien was filed long before the business ever failed a payment. A UCC lien doesn’t necessarily mean the business is in default. In fact, it likely just means the business got a loan of some kind. So how does that happen? And why don’t business owners get any notice that a UCC filing has been made?
To understand why, start with the Uniform Commercial Code itself. Every state has different regulations, and those rules and laws are what the UCC was designed to standardize across the nation. Without it, commercial property transactions across the country would be much more complicated for borrowers and lenders working across state lines. A UCC lien is simply the way lenders protect themselves in case a business defaults or files for bankruptcy.
Here’s the part that surprises people: lenders often file the lien while they are still underwriting the deal. That means the lender does this while they’re still trying to decide if the loan will go through. Say you put up real estate as collateral for a bank loan. Under the UCC, a filed UCC statement provides ”public notice” that the lender has an interest in the collateral. So if you ever default or file for bankruptcy, the lender is in line to receive it. In other words, UCC liens are filed by lenders before the borrower is in default, even when every payment arrives in full and on time. It would happen regardless of your payment history. It’s just there to safeguard their interests.
Two more things catch owners off guard. The first is that a lien can stay on file even after a loan is paid off. That’s why business owners sometimes find a lien on file when they’re seeking financing with another lender. The lien is from a loan that has long since been repaid. The second is that some lenders write the lien into the application itself. That means the lien can be placed even though it’s just an application you filled out but never followed through on. If that happens, you may need to work with the lender to get it removed. So it can be a real shocker to find a lien on file, especially if you haven’t missed any payments on that loan.
The Lender Doesn’t Have to Tell You
Do you get a notice that you have a UCC lien filed against you? Not necessarily. If it’s been placed, the lender doesn’t have to tell you. Caught up in the application, the approval and how to spend the money, the borrower can easily overlook it or not even know it has been made. A UCC lien can be there for years. That means those liens can remain undetected until a new lender wants to run due diligence and require a UCC look up. Until then, it is your job to stay on top of it.
So how do you check? The best place to start is your state’s Secretary of State Office. Depending on where you live, you may be able to search for a lien on their website. Most states offer that, and some will also help over the phone. Some searches are free; others carry a small fee. If you see something on the list you don’t recognize, you’ll need to do some detective work to figure out who filed it and why. It is never a good idea to ignore something like that.
New Financing
Why does any of this matter if you’re current on every payment? Because it can affect new financing. Take a company that took out an SBA loan to expand. The SBA can file a blanket UCC lien, which means it has an interest in all the company’s assets. What happens if the business owner needs a new loan for equipment? Or remodeling? Then the second lender requires a UCC look up, and they see the lien that was filed earlier. That lender won’t have first rights to the collateral should you default or declare bankruptcy, which may discourage it from doing business with you. The two lenders can sometimes negotiate who is first in line if and when the borrower defaults, but that means additional time and leg work. It can even mean the closing date of the deal will need to be pushed back. Even worse, the existing lien could jeopardize the transaction entirely. You may not be in default, but when someone else wants to loan your company money, a UCC lien could put that new loan at risk.
When It Comes to Bankruptcy
If bankruptcy is on the table, the questions change. Does the lender have a lien on one particular asset, or a blanket lien on the whole company? The answer gives you a better idea of what the lender will come after if you move forward with the filing. When it comes to bankruptcy, understanding UCC liens matters more than ever. If you are behind on a merchant cash advance and trying to decide whether to negotiate, settle or file, knowing that a UCC lien may be protecting that lender is something else to consider. Negotiating is where a business debt settlement company like ours comes in; we work with funders and lenders to settle for less than the full balance owed. We are not a law firm, and when bankruptcy is the better path, we route owners to bankruptcy counsel.
A UCC lien isn’t something you find when you miss a payment. It often goes on file while the lender is underwriting the deal. The lender doesn’t have to notify you. And that lien may never be visible to the owner until someone else tries to loan money to your business. UCC liens can not only slow down a new transaction, they can jeopardize it entirely. Whether you end up needing a new loan, or whether bankruptcy is just a possibility, UCC liens can become a major issue. Get used to the process of checking your state’s UCC records whenever you’re looking for a new source of funding. And if the debt behind that lien has become more than your business can carry, a first consultation with Delancey Street is free and confidential.
