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If you’ve ever entered into a loan agreement and pledged your business’s assets as collateral for the loan or business line of credit, chances are the lender filed a notice called a Uniform Commercial Code (UCC) lien. The term “lien” traditionally has negative connotations but a UCC lien doesn’t affect your business’s day-to-day operations and there’s no threat of losing your pledged assets as long as you make payments according to the terms of your loan agreement. This filing is, in essence, the lender’s way of staking a claim to your company’s assets in the event of default. Depending on the terms of your financing agreement, the UCC lien may have been placed against all of your company’s assets or only on specific assets. Although this type of lien is most often associated with business loans, it can also be filed against an individual’s assets.
As part of the underwriting process, a security agreement is drafted which outlines the specific assets that have been pledged as collateral. Once the agreement is signed, it’s customary for the lender to file a UCC lien against the pledged assets. If your business is able to secure additional funding after the first lender has filed a UCC lien, potential lenders are made aware that the current lien holder has “first dibs” on the pledged assets should you default on the loan or go bankrupt.
To protect its interest in the pledged assets and secure its first-place position, the lender must file a UCC-1 Financing Statement (shown below) with the secretary of state in the state where the borrower is incorporated or based. In most states, the UCC-1 can be filed on the secretary of state’s website. This statement contains a description of the lien and the identities of the lender/lien holder and debtor. The filing of this statement makes the lender’s claim to the pledged assets “perfected” or valid. If the pledged assets are real property (such as buildings or equipment), the UCC-1 should also be filed at the county recorder’s office in the county where the borrower’s real property is located.
All UCC lien filings become public records and can be accessed by other lenders during their loan application processes. Once potential lenders are aware of the assets that have already been pledged as collateral, the approval of any additional financing may be adversely affected.
There was a time when a borrower could use the same assets as collateral with multiple lenders. This was possible because none of the lenders were aware of the borrower’s obligation to the other lenders. The purpose of UCC lien filings is to prevent this from happening by disclosing assets that have already been used as collateral. Today, all a potential lender has to do to protect its interest is perform a public UCC search to see if a lien has already been placed on the assets that the borrower proposes to pledge as collateral.
The types of assets that UCC liens are filed against vary depending on the nature of the business but liens are commonly filed against:
Because business transactions don’t always occur intrastate and because each state has its own laws governing commercial transactions, the Uniform Commercial Code (UCC) was established in 1952 to ensure uniformity in the laws of sales and other commercial transactions across the United States. Article 9 of the UCC covers secured transactions (loans involving collateral) and was designed to protect lenders that operate in multiple states. It ensures that the interest of the lender is protected regardless of the state in which the transaction takes place. For example, a lender in Ohio will have rights to a borrower’s pledged assets even if the borrower operates out of Michigan.
When a lender requires collateral to protect its interest in the event of loan default, one of two types of UCC liens is often filed as part of the process. The type filed generally depends on the purpose of the loan.
The specific collateral lien gives the lender rights to specific assets that were pledged as part of the financing agreement. This type of lien is often filed in transactions that involve the financing of physical assets such as equipment, inventory, vehicles, and buildings. The asset that was financed is commonly listed in the financing agreement as collateral. For example, if you finance commercial dry cleaning equipment, the lender will likely file a UCC lien against that equipment and list it as collateral in the financing agreement. Assets beyond those being financed are usually not pledged as collateral.
When a blanket lien is filed, the lender is staking a claim to all of your business’s assets. Once this type of lien is filed, it’ll be understandably difficult to obtain additional financing until the lien is satisfied and removed. The blanket lien is commonly filed to secure traditional bank loans, alternative business loans, and Small Business Administration (SBA) loans. The SBA and traditional bank lenders prefer to fully secure their loans and take all of your assets into consideration when making their lending decisions. Healthy businesses that don’t have substantial hard assets may obtain funding from alternative lenders using the blanket lien along with a personal guarantee to secure the loan.
If you have a secured financing agreement with a lender, ideally, you already know which of your assets have a UCC lien attached. If not, it’s easy to find out. UCC filing statements are public record and part of your state’s public UCC lien filing database which is often found on your state’s secretary of state website (example below). All you need to do is use your personal or business information to search the database. If a lien exists for you, you’ll be able to see the identity of the lien holder and a detailed description of the assets pledged as collateral.
When conducting your search, be sure to use the lender’s exact legal name. If you’re unsure of the correct legal name, consult the business entity database at the secretary of state where the lender is incorporated or based.
Generally, a UCC lien filing won’t have a direct impact on your business’s day-to-day operations. As long as you honor the terms of your security agreement by making timely payments and don’t default on your loan, you needn’t worry about the lien. There are, however, risks involved with having a UCC lien against your assets. These risks should be given serious consideration before starting the loan application process.
Because traditional bank loans, SBA loans, and alternative loans generally require collateral as part of the financing agreement, a UCC lien could make it difficult to obtain additional financing before the lien is satisfied. Before lending to you, banks and other lenders would prefer that your assets be free of liens so that they can be pledged as collateral to secure the new loan.
For example, a borrower may have secured the long-term financing needed but require short-term financing (working capital) to help through a rough patch. If the borrower has a blanket lien associated with the long-term financing agreement, all of their assets have already been pledged.
Borrowers with a UCC blanket lien have the following options when needing to obtain additional financing:
All UCC liens from the past five years will show on your business credit report in a section devoted to UCC filings. Their mere presence on the report won’t affect your overall score, however, potential lenders will likely focus on the loan amount and payment history as part of their lending decision.
It’s important to regularly review your business credit report (especially before seeking new financing) to identify any liens that have been satisfied but still show as outstanding.
When assets are pledged as collateral for a loan, the borrower risks losing those assets in the event of loan default. When a UCC lien is filed to protect the lender’s interest, the pledged assets are currently at risk until the loan is paid in full. However, the UCC filing only gives notice of the lender’s right to the assets. Legal action would still have to be taken against you or your business for the lender to benefit from the filing.
A UCC lien is good for five years, after which it’s considered expired and no longer valid. If the debt hasn’t been repaid within the five-year period, the lien holder can extend the lien by filing a continuation statement within six months before the initial filing expires.
If the loan is repaid in full before the five years lapses, lenders aren’t required to file a UCC Financing Statement Amendment (UCC-3) to remove the lien. For this reason, most lenders don’t file the amendment and, instead, will let the lien automatically expire. If you want to have the lien removed, requesting that the lender file UCC-3 is one option.
At any time, a lender can have hundreds or thousands of outstanding financing agreements for which they’ve filed UCC liens. Staying on top of all of their filings can be a formidable task so some lenders opt to have a lien portfolio management service handle their initial lien filings (UCC-1), financing agreement amendments (UCC-3), and continuation statement filings. By doing so, lenders don’t have to worry about whether their lien filings were made correctly or if they forgot to file a continuation statement in time.
When submitting your final payment to the lender, or any time after the loan has been paid in full, you can submit a request for the removal of the UCC lien. Once your request is received by the lender, the removal process can commence and you should be given confirmation that UCC-3 (shown below) has been filed. Some lenders (or the lien portfolio management service they’ve hired) will provide the borrower with a copy of the paperwork that was filed with the state.
Your lien removal request should include the filing number of the original UCC lien (UCC-1), reference to the debt being paid in full, and an official request to remove the lien.
If you submitted a written request to the lender for the removal of a UCC lien and haven’t received written confirmation (after waiting 20 days) that UCC-3 was filed, you can file the financing statement amendment on your own. In boxes A, B, and C of the UCC-3 form, instead of the lender’s information, you would enter your name, phone number, email address and mailing address as the filer.
As a third option for having a UCC lien removed, you can visit your state’s secretary of state office and swear an oath of full payment. By doing so, you’re essentially confirming that you’ve paid the debt in full and you’re now requesting that the lien be removed. This can be done at any time after the loan is repaid and the lien will be removed just as if you or the lender had filed UCC-3.
Although UCC lien filings are standard practice in financing and not cause for panic, be proactive in your loan transactions. Before beginning the loan application process, always ask lenders if they’ll be filing a UCC lien. Some commercial mortgage lenders will file a UCC lien against property that has already been secured at 70% loan-to-value (LTV) or less, in some cases. By knowing ahead of time of their intent to file the lien, you can request that they not do so.
It’s essential that you regularly review your business credit report for outstanding liens. Performing a UCC lien search via your state’s secretary of state database will also help you to discover any liens against your business’s assets.
If you discover that outstanding liens against your business exist, exercise one of the options in the section above to have them removed. It takes time for credit reports and your state’s public records to be updated so getting started now will save time and frustration during the application process should you need additional funding to grow your business.
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