The process of securing and paying back a small business loan is known to be unnecessarily complicated. Depending on the type of business lender you work with, you may need to complete or review a series of documents designed to mitigate the risk of the borrower violating the terms of the partnership.
Not everyone who is approved for small business loans understands what is required of them. Business lenders must therefore take additional measures to ensure their own financial security. You would think that something like a personal guarantee would be sufficient but no, the business lender wants you to be 100% clear on everything you can and cannot do
One example of these documents is a UCC filing. In this guide, we’ll explain what a UCC filing is, why you need to be familiar with a UCC filing, and when you will most likely get your first experience with one.
A UCC filing, in the context of business financing, or UCC lien is a legal form filed by a business lender (or creditor) that distributes secured business loans. “Secured” refers to loans that require collateral, or an expensive asset the business lender can sell in the event of a default. A UCC filing is simply the business lender’s legal claim to the collateral. Examples of collateral include real estate, a car, or equipment.
Until the borrower repays the full amount that was distributed, the UCC filing states that the collateral legally belongs to the business lender. It also states that in the event of a default, the business lender can legally take possession the collateral.
So, yes: You can still live in your house, drive your car, or use your equipment, but from a legal standpoint, it is the property of the business lender until the debt is paid off in full.
Certain business lenders might require a UCC Filing before approving applications for products involving collateral.
“UCC” stands for “Uniform Commercial Code.”
The UCC was collaboratively established by the United States federal government and the US’s state governments in 1952.
In the US, states have the right to create their own laws. Various legal issues, however, often exceed state lines. One such issue is sales and acquisitions. The UCC is a set of laws that are followed by all states to make sure each state plays by the same rules in regards to commercial transactions.
The part of the UCC that deals with UCC filings is technically known as Article 1: General Provisions.
The legal name for a UCC filing is the UCC-1 Financing Statement. According to its original definition, a UCC filing can state that a business lender might have an interest in the asset of a borrower. It can also be modified to state that the business lender could legally claim every single piece of equipment or inventory owned by the borrower’s business in the event of a default. Sometimes, a UCC filing will state that the business lender can seize business assets, but it won’t name them specifically.
In most cases, the UCC filing is created primarily to lay out exactly what the business lender can do with the secured assets once it is established that the borrower will not be able to pay off the debt. Let’s say a borrower puts up his house as collateral. A UCC filing could state that in the event of a default or bankruptcy, the borrower’s house be foreclosed on. It could also state that the house be seized or just sold off.
UCC filings are active for five years, but that does not mean they are only issued for business loans with terms of at least five years. The five-year feature is included to clarify how long the business lender has to claim the assets named in the filing. If the terms of the loan exceed that time frame, the business lender must renew the filing once five years have passed.
Business owners are usually familiar with the concept of a secured business loan. They understand that once something is deemed collateral, you can’t sell it until the debt is paid back in full. Being able to do this would essentially defeat the entire purpose of collateral. A UCC filing is merely the official document that states that before the loan was approved, the business lender and the borrower agreed upon this arrangement.
Here’s another scenario you might not have thought of.
Let’s say you recently took out a business loan for a new piece of equipment. The equipment is serving as collateral and, as per a UCC filing, is legally owned by the business lender until the debt is paid back in full. But shortly after you took out the loan, an emergency occurs, and you don’t have the money to fix it. The only solution is to take out a second business loan. But when the business lender asks for collateral, you won’t be able to use your new piece of equipment. If you tried to do so, the business lender would discover your UCC filing after conducting a UCC search for your business’s home state. Any reputable business lender or financing company that offers secured business loans will conduct a UCC search before approving an application.
The fact that a UCC-1 Financing Statement is public record gives the business lender even more security. If it was not public record, it would be much easier for the borrower to strike a deal with another entity that could affect repayment of the existing loan.
Once you are approved for a secured business loan, business lender files a UCC-1 Financing Statement to the secretary of state in your business’s home state. The statement contains the business lender’s name and address, the borrower’s name and address, and the name of the assets being used as collateral. Notices of the filing are then made public record and may therefore be published in local newspapers.
UCC filings are typically placed on the most common assets used for collateral: real estate and business equipment. But while business lenders can legally place UCC filings on virtually any type of business asset, most US states prohibit borrowers from literally taking everything. In the event of a default or bankruptcy, the borrower would be able to keep a few thousand dollars’ worth of equipment or a certain amount of money saved up for retirement.
Most US states also prohibit business lenders from seizing a certain amount of personal assets. This can refer to specific items, like furniture in your home, or certain portions of equity in your home or vehicle. If your home is used as collateral, for example, your business’s home state may allow you to keep roughly $50,000 worth of equity in the event of a default or bankruptcy.
Since each state has its own UCC filing laws, it is advised to research the laws in your business’s home state before agreeing to a business loan that requires a UCC filing.
Many business loans have been denied due to existing UCC filings with another business lender. The borrower may have forgotten about the aforementioned five-year rule, or the business lender may have neglected to terminate the filing once the debt was paid back in full. So, after making your last loan payment, you should make sure your business lender terminates the filing. Some business lenders will not automatically terminate the filing after the debt is paid off, and will only do so after being contacted by the borrower or once five years have passed.
The various risks illustrated in this guide suggest that you should steer clear of UCC filings at all costs. Yes, the average borrower would definitely prefer to have less things to worry about while paying off debt. But UCC filings are often required by business lenders that offer high borrowing amounts, convenient terms, and low interest rates. This requirement should not stop you from taking advantage of opportunities that you worked so hard to qualify for. As long as you pay off your loan on time and monitor the status of UCC filings against your business, you probably won’t be giving up any business or personal assets. All in all, UCC filings are just another reason to make sure you know what you’re getting into before accepting a small business loan.
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