The Perfection Series: UCC Filings

While a security agreement creates a lender’s right to collateral, it does not automatically protect the lender against competing claims from other creditors. To fully secure their interest, lenders must perfect their security interest—most commonly by filing a UCC-1 financing statement under Article 9 of the Uniform Commercial Code (UCC). This filing serves as public notice that a lender has a legal claim to specific assets, preventing borrowers from using the same collateral for multiple loans without disclosure.

Why UCC Filings Matter

A UCC-1 financing statement is essential for establishing the lender’s priority in case of a borrower’s default. This document includes:

• The debtor’s name and address (must match official business records)
• The secured party’s name and address
• A description of the collateral (can be broad but must align with the security agreement)

Without proper UCC filings, lenders may find themselves in a weak legal position. Consider these common pitfalls:

• Failure to File Timely – A lender extends a loan to a business using its inventory as collateral but delays filing the UCC-1. Meanwhile, another lender provides financing and files first, giving them priority in a liquidation scenario.
• Inaccurate Debtor Name – If a lender lists the debtor’s name incorrectly (e.g., “ABC, Inc.” instead of “ABC Corporation”), the filing may be deemed invalid, allowing another creditor to gain priority.
• Overly Broad Collateral Descriptions – A UCC filing that describes collateral as “all assets” may be challenged in court, depending on jurisdiction. More precise language—such as “all equipment, accounts receivable, and inventory”—reduces legal uncertainty.

Priority and Potential Disputes

The first to file rule generally determines priority: the lender who perfects their security interest first has the strongest claim. However, exceptions exist, such as purchase money security interests (PMSIs), which allow certain creditors—such as suppliers financing new equipment purchases—to take priority even if they file later. For example, consider a construction company that secures a loan using its existing equipment. A lender files a UCC-1, claiming a general security interest in “all equipment.” Later, the company purchases new machinery using vendor financing, and the vendor files a PMSI. In this case, the vendor’s filing may have priority over the general lender’s claim regarding the newly acquired machinery.

Practical Considerations for Borrowers and Lenders

UCC filings not only establish legal priority but also affect business operations. Lenders and potential investors often review a company’s UCC filings to assess financial obligations. A business with multiple UCC-1 filings may raise red flags about its financial stability, while a company with a well-managed secured lending structure appears more creditworthy. Additionally, UCC filings expire after five years, requiring lenders to file continuation statements to maintain their perfected interest. Failing to do so can result in losing priority, exposing the lender to unnecessary risk.

A properly executed UCC filing is the final step in securing a lender’s rights to collateral.

UCC filings establish legal priority, prevent competing claims, and ensure that lenders have a clear path to recovering their investment if a borrower defaults. However, mistakes in filing—such as incorrect debtor names, untimely submissions, or vague collateral descriptions—can jeopardize a lender’s position. For lenders, staying proactive in monitoring and updating UCC filings is essential to maintaining financial security. For borrowers, understanding the implications of UCC-1 filings is equally important, as improperly managed security interests can impact future financing opportunities. Whether negotiating new credit arrangements or enforcing existing rights, both parties must navigate UCC filings carefully to avoid costly disputes.