UCC guidelines dictate how commercial transactions are handled throughout the United States; UCC stands for Uniform Commercial Code. If your business has ever financed equipment then you have some experience with a UCC filing. It is a way the federal government controls financial business transactions. Most states have adopted UCC rules of which there are nine articles that address different parts of our lending system. Each article is intended to make transactions safer for lenders and borrowers at the same time.
A UCC filing on your business is made to create a lien against the equipment or property used as collateral. Most lenders require a UCC filing because it clearly identifies a specific asset as being the lender’s property until the loan or lease is paid and the UCC is released along with title. Once you have an asset with a UCC filing, you can’t use it to get another loan with a different lender. The UCC-1 form provides security because in case of default no one else can claim title of those specific assets. Without a UCC, a lender would have difficulties in getting their collateral back.
What a business owner should clearly understand is that when you finance equipment and the lender files a UCC-1 on that equipment, that filing creates a lien on the business. It creates an obligation to pay the debt before you can sell or dispose of that equipment.
Other types of liens may include a mortgage on a building. A company car may have a lien as well and paying off the debt is the only way to remove the lien. You will not be able to get the deed on a commercial building or title to the company vehicle until the lien is paid completely. Your business is, however, allowed to use the building or car while you are making payments.
Perfecting a UCC Lien
UCC liens must be “perfected” to be recognized as valid against other creditors that may have an interest in your business. Perfecting the security interest refers to statutory requirements that complete a lien. This occurs when a lien holder files the UCC-1 form with the Secretary of State where your business is located.
Typically, the filing statement details the lien, the lien holder’s identity and your identity. This statement becomes public record where potential lenders can verify whether a conflict of security exists. If there is an existing lien on an asset, you will need to pay it off before another loan can use the same collateral. Otherwise, the transaction becomes invalid and the lender will not approve your loan.
A blanket lien is one exception to this rule. A blanket lien – where the creditor has rights to all of your business assets – could release some assets with a written statement from the creditor. Generally, a release is granted in this situation when you are replacing the collateral with an equally valuable asset. Lenders will issue a blanket lien when the amount borrowed is substantial compared to the assets owned; this is typical for larger energy projects.
Renewal and Termination of the UCC Filing
UCC rules provide an effective duration of UCC filings for five years. Creditors must renew the filing if the loan is not satisfied within that period. Failing to renew the UCC filing will result in a lapse and the lien is no longer perfected. Technically, the creditor could not challenge the lien in court. These are behind the scenes details that do not really concern the average business owner.
Once you have finished paying the debt associated with a UCC filing, the creditor must file a UCC release form. This serves as a termination statement regarding the lien. Any other creditor searching public records will see that there is no longer a lien on your business assets.
The Bottom Line for Your Business
Funding has been tight for many small businesses because of the financial crisis. Traditional banks commonly reviewed collateral and cash flow statements when deciding whether to lend money. Third party funding sources with more lenient requirements have become attractive to business owners. Even though these alternative lenders are more willing than banks to make business loans, they still want security in being repaid. Many people often think third party lenders will approve any type of credit which is not the case. Therefore, they will use a UCC filing as a secured agreement for repayment. Getting money or a loan through these sources can offer many benefits to your business. Nevertheless, you must understand what the filing does for your business.
The UCC laws vary from state to state. In some cases, the fine print on a credit application serves as your UCC filing notice of the creditor’s authority. Consulting with an attorney regarding UCC filings may help you make the best decision for your business. It is good to understand that the equipment you are financing is really the lender’s equipment until you make the final payment; even though you can depreciate it and treat it as your own, it still belongs to the lender.