What is a UCC Filing? (And Why You Need to Know)

What is a UCC Filing? (And Why You Need to Know)??

For small and mid-size business owners, securing capital to grow your business is a top priority. But you might notice something unusual on your credit report when you obtain a new loan: a UCC filing. Commercial lenders frequently request collateral to secure a loan amount when providing funding to smaller enterprises. They'll add a "UCC-1 file" to your business credit report, which stands for Uniform Commercial Code, to make the transaction official.?

A UCC-1 form (often referred to interchangeably as a UCC filing or lien) doesn’t necessarily hurt your company's credit, but it can have an impact on your future capacity to receive financing. In this guide, we will explain what a UCC filing is, why it is important to be familiar with it, and how it can impact your business.??

What is a UCC-1 Filing??

Let’s start with the basics. Simply put, a UCC lien or filing is a document that a lender files with the government to create a security interest in the personal property of a borrower to protect a lender from nonpayment.??

So, if a borrower fails to pay, a lender has the legal right to repossess the property listed as collateral. UCC filings are a part of a set of guidelines developed by the Uniform Commercial Code (UCC) to control and regulate how business transactions are carried out. Here’s everything you need to know about the Uniform Commercial Code, filings and what it all means for your business.????

What is the Uniform Commercial Code??

The Uniform Commercial Code, first established in 1952, is a set of laws adopted by all states in the US. The purpose of their existence is to standardize how commercial transactions are executed.??

To put it simply, the UCC is a list of laws that businesses must abide by when conducting sales of goods and commercial transactions including loans and liens. While there are many laws covered within the Uniform Commercial Code, the aspect we'll be talking about — and what your business should be cognizant of — are UCC-1 filings. ?

An Example of a UCC Filing?

One of the easiest ways to explain what a UCC filing entails is to relate it to a mortgage in the real estate space. Let’s say you go out and buy a house for half a million dollars. You pay a down payment of 20% and then finance the rest of the $400,000. When you do, the lender is going to place a lien against the house for that amount to secure their investment. As time goes on, hypothetically you are successful in making every single payment and eventually your mortgage is released.???

However, if you are unable to make payments on your mortgage and you default on your loan, the lender has the legal right to take your home away and resell it to recover any investment made in extending the loan to you.??

UCC filings work in essentially the same way. They are released in a similar manner that a mortgage is released in that a cancellation statement is filed when paid in full. Lenders can affix UCC liens to a variety of assets, not just including real estate, but also vehicles, receivables, inventory, office equipment, investment securities and more.??

How to Remove a UCC Filing??

The easiest way to remove a UCC filing is to pay a loan off in full. Then, upon successfully paying back your loan, your lender will file a financing statement which can result in the removal of the lien.??

Sometimes these financing statements aren’t filed as rapidly as businesses want — after all, lenders have numerous accounts to keep track of every day. Luckily, business owners have options to speed things along.??

To urge a lender to remove a UCC from a business’s records after a loan has been met, owners may file a termination statement with the lending party. Often, UCC filings can be resolved through direct correspondence with your lender, but rest assured you do have the support from your local Secretary of State office if a lender becomes unresponsive.??

How Does a UCC Filing Impact Your Business?

UCC filings are a standard component of obtaining a business loan secured by collateral and normally do not influence ongoing business activities. As long as you understand your obligations to your lender and you diligently keep track of your financial records, there is no reason a UCC filing should be a detriment to your business.??

While UCC filings do not directly impact your credit score, and are normal practice for lenders, they can be an inconvenience to borrowers if not handled properly. For instance, if your business has outstanding UCC filings active, you may find you will have a more difficult time being approved for a loan with another lending party.??

Nonetheless, it is important to remember that UCC filings do not have to cause fear. Staying on top of financials and monitoring your current and past UCC filings will enable your business to secure financing with little issue.??

All in All: Important Things to Note???

In some cases, your business may be denied a loan due to existing UCC filings with another business lender. After making your last loan payment, ensure that your lender terminates the UCC filing. Keep in mind, some business lenders do not automatically terminate a filing after the debt is paid off. It may be best to be proactive and communicate with the lender to make sure the lien is off your record.??

It is also important to recognize that while UCC filings do not affect your business credit score, they can impact whether other lenders are willing to provide additional loans later on. Overall, UCC filings are just another reason to continuously monitor your business credit and ensure that outdated UCC filings are not on your record, as it can affect the direction of future business affairs.??

If you are concerned about how a UCC filing may impact your business, consider discussing with lenders before you apply for a loan to inquire about their policies. For more information regarding UCC filings, NCS Credit offers around-the-clock support and guidance for borrowers and lenders.??