United States
Updated: October 9th, 2023
The Uniform Commercial Code (UCC) is a set of US laws pertaining to commercial transactions. When a bank or other financial entity makes a collateralized loan to a business, it files what is known as a UCC-1 financing statement with the Secretary of State’s office, in the applicable state. The letter serves as an official public notice “that one person claims an interest in someone else’s property, usually as collateral for a debt.” (State of Tennessee Business Services Division) The form may be filed in more than one state, depending on how the personal property and/or the business are situated.
A UCC filing (or UCC lien) benefits a lender by establishing “priority in case of debtor default or bankruptcy.” California Secretary of State) This filing is good for up to five years and must be renewed, or continued after five years in order to retain priority status. By establishing a secured debt obligation, such as a piece of heavy machinery or even all of a business’ assets, UCC filings help protect a creditor’s security interest.
Take a Californian restaurant, for instance. If the owner takes out a loan to finance a new kitchen oven, the lender will file a UCC lien in California aginst the borrower’s assets. This lien states that if the debt for the oven is not paid off or if there is some type of borrower default, then they as the lender have the legal right to seize the oven and whatever other property to repay the debt.
If multiple lenders financing the same small business, place UCC liens against the same collateral, then whomever filed first gets priority and the others will be ranked based on submission date. So, if you expect to secure funding through multiple lenders, its wise to work out priority status with all parties prior to accepting the offers. Afterall, once a businses establishes priority, it will more than likely be difficult convincing them to give up their position to another lender.
An accepted UCC filing could impact a business’s ability to borrow from multiple sources. Business owners must anticipate the amount of funds they will need and plan to borrow accordingly before a UCC lien is filed.
While each state’s form may vary slightly, the basic requirements are fairly consistent across all states.
Once a UCC lien is processed by the Secretary of State Department, the filing will become public record. Additionally, the business’ credit profile will reflect the details of all UCC liens for the past five years via an updated UCC financing statement. Amendments to UCC filings may also be submitted to update secured asset listings.
Once a loan has been paid in full, the borrower is responsible for filing a Uniform Commercial Code lien—an amendment form consisting of a termination option. By completing this form, the borrower requests that the lender notifies the Secretary of State of the loan status.
Any business owner, especially small business owners, should carefully review their bank account and personal assets before risking their business credit with UCC filings. The financial protection that UCC filings provide to secured party creditors can risk the debtor’s assets. However, UCC filings adequately managed will provide a debtor with the assets to grow their business.
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