What is a UCC Filing? And How It Works

UCC Filing is a document that allows lenders to take possession of assets used as collateral if the borrower defaults on the loan. 

What is a UCC filing?

When pursuing asset based lending as a secured loan, you might encounter a UCC filing.

• Legal notice: A UCC filing is a legal notice that a lender files to publicly announce its connection with an asset. The document established a formal claim that may be necessary if a borrower defaults on their loan. 
• Filing protects the lender’s interests: With this document in place, the lender has a legal claim to a borrower’s assets if they default on the loan. 
• It’s specific: A UCC filing will specifically outline what assets the borrower is putting up as collateral for a particular loan. If the loan is secured by a blanket lien, it will outline a broad umbrella of your assets. 
• It affects your business credit report: If a lender puts in a UCC filing, that information can negatively impact your credit and prevent you from obtaining future financing opportunities. 

What does UCC stand for?

The term UCC isn’t very descriptive. Here’s a closer look:

• Meaning: UCC stands for Uniform Commercial Code. 
• Use: The UCC was created to govern the sale and leases of goods across state lines. 

The code is divided into nine articles. Here’s what you need to know about each.

• Article 1: The first article established definitions and processes for UCC application. 
• Article 2: Article 2 covers the sale of goods, except for real estate and service contracts, and leases of personal property. Article 2A covers leases. 
• Article 3: This covers negotiable items, including checks, drafts, and notes. 
• Article 4: Article 4 outlines bank deposits, collections, and fund transfers (Article 4A). 
• Article 5: This covers letters of credit, which are issued by a bank. 
• Article 6: Article 6 covers bulk sales, auctions, and liquidation of assets. 
• Article 7: This article outlines how to handle documents of title, such as warehouse receipts. 
• Article 8: Investment securities are covered in article 8. 
• Article 9: Article 9 covers secured transactions of personal property, promissory notes, consignments, security interests, and agricultural liens. 

When Are UCC Liens Used?

UCC liens aren’t used in every secured loan situation.

• When it’s used: Lenders use this type of lien on non-titled equipment and inventory financing. That’s because there’s no title record that can be used to track the lender’s interest in your asset. 
• Multiple assets: When a lender is offering a secured loan based on multiple assets, a UCC filing will allow the lender to specifically name all of the affected assets and the types of collateral for the loans. 

What does a UCC-1 mean?

UCC-1 means that the lender is filing a document under the rules of the first article of the Uniform Commercial Code. But two types of fillings can take place.

• UCC liens against named collateral: This filing legally indicates a lender’s interest in a specific asset or multiple assets. 
• UCC blanket lien: With this type of lien, the creditor obtains a legal interest in all of the borrower’s assets. Lenders clearly prefer this option because it means the loan is secured by multiple assets. But if you don’t want certain assets included in the blanket lien, there’s an option to specific leave out some of the business’s assets 

How UCC Filings Affect Your Credit and Ability to Obtain Financing

A UCC filing isn’t just a public announcement that a lender has an interest in your collateral assets. It can also be a negative mark on your business credit report. So you might want to consider looking into unsecured vs secured loans, to see which option best suits your needs. Here’s how a UCC filing affects credit scores.

• Shows up on your business credit report: A UCC filing against your business assets will show up on your business credit report. The threat of default and subsequent loss of your assets could make other lenders unwilling to offer other financing opportunities. 
• The information remains for up to five years: A UCC filing will remain on your business credit report for five years. That could limit your financing opportunities for a significant period of time. 

But not all lenders will view your UCC filing as a final red flag. With that, it’s still possible to get other financing opportunities. Here’s how:

• Use other collateral: If your business has assets that aren’t included in the UCC filing, you can use them to secure other loans. 
• Ask for a release of assets: As you pay off the loan, the size of your collateral may not need to be so large. After you’ve made progress on your loan balance, ask the lender to release some of your assets. This is likely only an option for borrowers that have consistently made on-time payments. 
• Work with a lender willing to accept a second position: Although all lenders prefer a first position on the lien, some are willing to accept a second position. 

How to File a UCC Financing Statement

First, what is a UCC financing statement? It’s a document that outlines the details of a lender’s claim to a borrower’s collateral assets.

As a lender, it’s critical to file a UCC financing statement. Otherwise, you might not have the legal standing to seize a borrower’s assets when necessary.

Here’s where to file a UCC financing statement:

• Where to file a UCC-1 filing: You’ll file this document at the appropriate state’s Secretary of State office. The filing should occur in the state where the debtor is incorporated. 
• Information to include: The office where you file the document should provide all of the necessary filing details to include. But most states will require a detailed description of the asset, information about the borrower, and the lender’s contact details.