How lenders protect themselves by backing your loan with your business assets.
You might have heard that some lenders don’t ask for collateral but require a UCC lien on your business assets. This generally means that your business might have to give up those assets if you can’t pay back your loan. Getting a business loan that requires a UCC lien might be riskier, but it could also open up more competitive rates and terms.
What is a UCC lien?
A UCC lien — also known as a UCC-1 filing or UCC-1 lien — is a legal claim that a lender has on one or more of your business assets in case you default on your business loan. It makes financing less risky for lenders and creates a systematic way for them to back the loans they issue with assets. These might include:
- Accounts receivables
- Office furniture and equipment
- Real estate
- Promissory notes
- Letters of credit
UCC liens are common on many business loans, even if the lender doesn’t require any specific collateral.
What does UCC stand for?
UCC stands for the Uniform Commercial Code. It’s a set of laws that govern business transactions across the United States and applies in all states. However, each state has its own methods of enforcing these rules, even if the basics stay the same.
UCC liens usually last five years, even if your loan comes with a longer term. In that case, it’s your lender’s responsibility to renew the UCC lien to cover the remaining time you have to pay off your loan.
How does a UCC filing work?
A UCC filing starts when you sign your business loan’s security agreement. The security agreement is part of your loan documents and allows your lender to file a lien against all or some of your business assets.
Once your lender receives the signed security agreement, it files a UCC-1 financing statement with the secretary of state in the state where your business is incorporated. If your lender is filing a lien on physical property like equipment or real estate, it must file the financing statement in the county where your business keeps that property.
The UCC-1 financing statement is a one-page document that contains the following information:
- Your business’s name and address
- Your lender’s name and address
- A list and description of collateral
After your lender files the financing statement, the UCC-1 lien becomes a part of public record.
When securing a loan with a specific asset, your business typically can’t put that item up for collateral again until the lien is removed. However, more than one lender can file a UCC-1 lien on a business’s assets.
Here’s how it works: Whoever files the lien first gets first dibs on your business’s assets when things go south. After it’s seized enough to cover what your business owes, the next lender to file a lien gets access. Typically, only short-term lenders are willing to be the second or third lender in line. Some lenders might be willing to work with a business that already has a UCC lien on the condition that you remove it first.
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The two types of UCC liens
There are two types of UCC filings when it comes to business loans: liens against specific collateral and blanket liens against all of your business assets.
1. Specific collateral liens
Your lender files a UCC-1 lien against one specific asset to use as collateral for your loan. For example, if you took out a loan to buy a dough mixer for your pizzeria and pledged it as collateral, your lender would file a lien against that specific dough mixer and nothing else. These are common for loans to buy inventory, vehicles or equipment.
Liens against specific collateral work in two ways: They pledge the collateral to your lender and ensure no other lender can use that specific collateral on a loan until the lien’s lifted.
2. Blanket liens
Your lender files a UCC-1 lien against all of your business assets when you don’t have a specific item to back your loan. If you have certain assets you want exempt from the blanket lien, your lender may allow for exceptions. These are common with term loans from banks, online lenders and SBA loans.
A blanket lien can help you secure a business loan when you don’t have enough physical assets to back the amount you’re borrowing. And lenders typically prefer blanket liens because they’re more flexible. However, it can make it difficult to qualify for other business financing until the lien is removed.
What type of lien might my business expect?
Typically, businesses don’t have a choice between a lien against collateral or a blanket lien when they apply for a loan. It often depends on what type of financing you’re looking for.
Loans that require collateral
- Equipment financing. Most equipment loans and leases require a UCC-1 lien on the items you purchase with the loan.
- Auto loans. Loans and leases for business cars also typically require a UCC-1 lien on the vehicle.
- Inventory financing. Lenders use your business’s inventory as collateral when you apply for inventory financing.
- Invoice factoring. Factoring companies often use a UCC filing on your accounts receivables.
Loans that require a blanket lien
- Business term loans. Short- and long-term loans from banks and online lenders alike often require a lien on all of your business assets.
- SBA loans. Most SBA loan programs involve a blanket lien on your business assets.
- Commercial real estate loans. You might think that real estate loans are backed by the property, but many actually involve a blanket lien.
- Merchant cash advances. Most merchant cash advance companies don’t file a lien at all, but some might.
3 ways a UCC lien can affect your business
Before taking out a business loan that requires a UCC lien, consider the ways it could impact your business.
- It can make it difficult to get another loan. While you might be able to get a short-term business loan when you have a UCC lien, most traditional lenders won’t work with your business until the lien is removed.
- It will show up on your business credit report. All UCC liens filed in the past five years will show up on your business credit report, even after they’re closed. While it won’t affect your business’s credit score, creditors will see it if you apply for another loan or credit card.
- Your business could lose its assets. The point of a lien is to give your lender access to your business assets if you default. It’ll need to take legal action first before seizing anything, however.
How to check for a UCC lien
Not sure if your business still has a lien on its assets? You can check by visiting the secretary of state’s website in the state where your lender would have filed the lien. Can’t find it there? You might want to try a commercial UCC search engine like CSC Global.
How can I remove a UCC lien?
You can only remove a UCC lien after your loan is fully repaid, and the process varies by state. Most require the lender to file a UCC-3 financing statement amendment. However, lenders aren’t required to do this automatically.
To get your lender to file the UCC-3 statement, send a signed written request — also known as an authenticated demand. Once your lender receives your request, it has 20 days to either remove the lien or send you a statement allowing you to.
If your lender doesn’t do either of these things within 20 days, you can file the UCC-3 statement yourself.
UCC liens are common with most types of business financing, whether it’s a lien against a specific item or all of your business’s assets. Even some unsecured business loans might require a blanket lien. While it can help your business qualify for more favorable rates and terms, it can also limit your credit options and put your assets at risk.
Interested in learning more about how business financing works? Check out our business loans guide, where you can also compare top lenders.
Frequently asked questions
Image source: https://www.dos.ny.gov/forms/corporations/UCC1.pdf