Why UCC Filings are important to business owners?
Most businesses will borrow money or open lines of credit at some point in the life of their business. All business owners should have a basic knowledge of the types of UCC filings most often used by lenders, because having a UCC Financing Statements filed against your business may prevent you from borrowing money or selling your business.
What are UCC Filings?
All 50 U.S. states use a UCC Financing Statement that looks like this.
When a bank or commercial lender makes a secured loan they file a Uniform Commercial Code ( UCC filing ) document indicating their collateral interest in the borrower’s assets. The UCC filing is recorded with various state and local jurisdictions to protect the lender’s interests. There are various UCC filings, however most important UCC filing form small businesses are affected by is a UCC-1 form also known as a Financing Statement.
A Financing Statement is filed to protect a lender’s security interest in a specifically named piece of collateral. It also serves to establish the lender’s priority in case the debtor defaults or files bankruptcy. All lenders in the U.S. are required to use the same form to give public notice of their interest in certain or all assets of a business securing a debt. UCC-1 forms are filed in the secretary of state’s office in the state of the debtor’s business, however, it can also be filed in multiple states if the business is on a border or if the business has locations in multiple states. All information on a UCC-1 is public information. Many states offer online UCC searches that produce a report of all your UCC filings for a small fee .
Before a lender makes a secured loan in which it intends to file a UCC-1 form, it does a lien search to make sure there are no other UCC-1s filed against the piece of collateral being financed. If several lenders have filed UCC-1s against the same piece of collateral, the one that shows the oldest file date/time stamp on it is considered the 1st lien. Priority of a lien is determined by the date/time it is received at the Secretary of State’s office. Unless negotiated in advance, a lender generally will require it to be in the first lien position. Depending on the type of financing, a lien may be filed against a very specific asset (i.e. piece of equipment with serial number), or it can be what is known as a blanket assignment. A blanket assignment is one in which the lender has named all of a company’s assets as collateral for the debt.
When a UCC-1 is terminated by a lender it is done so with a UCC-3 form. Once a UCC-3 has been filed by a lender the collateral securing their loan is released and cleared from obligations.
How often should I review my UCC Filings?
Business owners should review all UCC filings once a year. The reason is there should be no surprises when a business needs to borrow money or wants to sell its ownership. It is not unusual for it to take several weeks or months to get a former lender to terminate their interest in their UCC-1 after a loan has been paid off. The most difficult cases arise when a bank or lender is sold to another lender and the new lender doesn’t have any records of ever making the loan, or . It is not unusual for a bank to refuse to terminate a UCC-1 from the previous lender whom they acquired loan until they have researched the loan, found all the supporting documentation and feel comfortable that all interest in the collateral can be released. It can be frustrating process for a business owner to get a UCC terminated, and often will need the assistance of a finance consultant or banking expert to help with the termination process. Our best advice, is to get UCC-1’s terminated by a lender as soon as the loan is paid off and to keep good records to avoid surprises later.
Top three things to know about UCC Filings
1. It is not unusual for a material supplier to file a UCC-1 Financing Statement. This is often a condition to receiving trade credit. Somewhere in the fine print of the credit application a business will give the trade supplier the right to file the UCC-1. This type of fine print is also found in credit applications of some commercial credit providers. Before you sign a credit application from a material supplier or commercial finance company make sure you know if it gives the other party the right to file a UCC-1.
2. UCC-1 Financing Statements are valid for 5 years unless “continued.” If your business has a twelve year loan, your lender will often renew or continue the UCC filing every several years. Each new continuance of the UCC-1 Filing will extend the length of the filing for another 5 years. Lenders will also amend UCC filing statements from time to time to update information like address, guarantors, and collateral. Good record keeping will help you remember when to review and request teminations of UCC filings.
3. Once your business pays off a loan to a secured lender you should immediately ask them to terminate their UCC filings. Most lenders will not automatically do this. You need to request this in writing to assure that it is done promptly. Most states charge a nominal fee from $10.00 to $15.00 for terminating a UCC-1 Financing Statement. Normally the lender that is terminating the UCC pays the fee.
In conclusion, the more aware a business owner is about the financing process the better they will be able to manage their business. Your CPA or financial adviser should be able to guide you through the borrowing process. If you have any questions about your current business financing or need to establish new lines of credit, equipment financing, restructure your current debt or apply for a new business loan, you are welcome to call us for a free and confidential consultation. Business Finance Solutions has funded over $400 million in loans for our clients across the country over the last 20 years.
For more UCC filings information or a private consultation, please contact our Banking Expert: Sam Thacker at 512-990-8756
512-990-8756.