For small business owners seeking to grow or expand their operation, there are few things more important than having an up to date understanding of your personal and business credit history. Your past experience and success in business, as well as your personal creditworthiness, can play a central role in determining whether or not you are eligible for business loans and other forms of financing. Having an accurate understanding of your records can help you prepare for scrutiny from banks and other lenders.
A UCC filing is a public notice that a financing provider may have a security interest in certain business assets. It does not automatically mean the business has defaulted, and it should be reviewed as part of the financing terms.
When examining your company records or checking your business credit score, you may come across what is known as a “UCC Filing” attached to certain documents or agreements. Though it might appear that your business is being flagged for some reason, receiving these classifications is standard practice for many small businesses, and can directly impact your ability to receive and make use of external financing.
A UCC Filing is simply an indication that a lender or creditor is interested in retaining certain pieces of your personal and business assets in the case of default; it is, more or less, written proof of securing a loan offered to your business. So long as you keep track of your financial records, and understand your obligations to lenders and creditors who’ve issued UCC Filings, there’s no reason a UCC-1 Filing should get in the way of your success as a small business owner.
UCC filing, collateral, and personal guarantee are different concepts
A UCC filing is a public notice tied to a security interest. Collateral refers to assets that may support secured financing. A personal guarantee is a separate commitment that may make an individual responsible for obligations. Understanding the differences before accepting financing terms can help business owners review what they are agreeing to.
For businesses reviewing collateral-backed structures, see collateral for business financing. For broader operating capital needs, working capital loans may be relevant depending on the structure and use of funds.
What is a UCC Filing?
A UCC filing is a document that a lender files with the government when they have secured a loan or financing with one of your business assets. A UCC filing, or uniform commercial code filing, might be issued if you take out an equipment loan or commercial mortgage. UCC filings can be removed from a business’s records once a loan or debt is repaid in full.
When a small business owner is approved for secured financing, the lender or creditor files a UCC-1 statement with the state to publicly indicate their right to repossess or reclaim certain business assets in the case of default. These filings primarily protect lenders from the default, as they ensure that certain assets and property cannot be used in multiple financing arrangements at once.
For example, if the owner of a pizza restaurant is seeking to increase their delivery capacity, they may file for equipment financing in the form of a new company car. When that agreement is made, the equipment lender would file a UCC-1 Statement on the car itself, staking their claim to repossess the vehicle if its cost isn’t repaid in full by the business. While that UCC filing is in place, the restaurant may use the vehicle for business purposes, but cannot treat it as a usable asset for further financing agreements.
When filing a UCC-1 Statement, creditors must provide the state with 3 basic facts: the debtor’s name and address, the creditor’s name and address, and a description of the security interests in question. Statements expire after 5 years unless renewed by debtors, and can be removed at the request of lenders once a piece of financing has been repaid. To urge a lender to remove a UCC-1 statement from a business’s records after a loan has been met, owners may file a UCC-3 termination statement with the lending party.
What Does UCC Mean?
UCC-1 statements are issued under the blanket legal structure known as the Uniform Commercial Code (UCC). The UCC was written as a means of standardizing business practices across the fifty states and lays out a set of laws and procedures that govern transactions in territories that have adopted the code. Asset transfers, leasing arrangements, and business lending agreements are all examples of common business practices that are standardized under the UCC.
What is UCC-1?
Uniform Commercial Code Article 1 is perhaps the most consequential piece of the UCC for many small businesses. The first section of the code dictates that lenders may file UCC-1 statements when entering into collateral loan agreements with business owners, and sets an expiration period of 5 years for filings that are not renewed.
UCC-1 also sets out an explanation of the purpose of the entire Uniform Commercial Code, clarifying that the code is meant to not only standardize business law and practices across jurisdictions but to increase correspondence and decrease conflict between businesses and institutions in similar industries. To that end, the purpose of UCC-1 statements is to create a publicly accessible record of a business’s collateralized assets and outstanding loans. With this information in the public eye, financial institutions can ensure that their loans aren’t implicitly linked to another financing arrangement, and can issue financing with a complete understanding of a borrower’s existing lending obligations.
What Does a UCC Filing Mean for Your Business?
While UCC-1 filings don’t negatively impact your credit score or business history and are standard practice for lenders and creditors, they can prove inconvenient for business owners if they are not dealt with properly. While UCC statements are active, business owners may have a harder time being approved for favorable financing terms with new lenders and creditors. With certain assets “promised” to the lender which holds a UCC-1 statement, businesses have less to offer as collateral in future agreements and may be seen as at greater risk for default. To that end, it’s important to monitor and track your business’s outstanding UCC-1 claims, and to file for termination once your loan or financing obligations have been met.
Before taking out a collateralized loan, consider whether or not your business is in a position to repay debts. Pledging collateral means that you are risking whatever you pledge in the case of default, so ensure that whatever financing you obtain will result in growth or advancement for your business and that your ability to repay other financial obligations will not be compromised as a result of the new arrangement.
Author:
Jeffrey Bumbales
Director, Marketing & Strategic Partnerships at Credibly
Frequently Asked Questions about UCC filings
What is a UCC filing?
A UCC filing is a public notice that a financing provider may have a security interest in certain business assets.
Is a UCC filing the same as collateral?
No. Collateral is the asset or property involved, while a UCC filing is a public notice of a security interest. Learn more about collateral for business financing.
Does a UCC filing mean the business is in default?
No. A UCC filing can be part of the original financing structure and does not automatically mean default.
What should a business review before agreeing to a UCC filing?
Review the secured assets, filing scope, release terms, personal guarantee language if any, and how the filing may affect future financing.
