Lenders use UCC filings to show what they can claim if a borrower defaults on a loan. In addition to listing what the lender is legally entitled to, the report can also show other UCC filings from previous loans.
Whichever lender files first is the one that gets first access to the listed assets, and this is where knowing how the standard UCC filing process works, the intricacies of the UCC-1 form, and the amendments of a UCC-3 form come into play.
There are 2 steps lenders use during the loan process:
- UCC-1, also called the “UCC Financing Statement,” is the form that lenders use when they do a UCC filing. This will have your business information and the details of what equipment the loan is for, as well as what a lender can claim if you default.
- UCC-3 filings are used to amend, end, assign, or extend the lender’s claim on the equipment.
UCC filings are nothing to worry about when you’re getting a loan since they’re common practice. With equipment financing, the lender may be able to lower their risk because they can claim specific pieces of equipment and sell them to recoup their losses if you default.
When the lender has less risk, they may keep their interest rates lower in order to win your business. That’s where this guide comes in. Below, you’ll find tips for the UCC filings process when applying for a small business loan that requires collateral, like the new equipment you want to finance and existing assets you’ve already paid for.
UCC-1 Filing Tips
When taking an equipment financing loan, talk to the lender about what and how they intend to list your assets as collateral on the UCC-1 filing form. If the lender is too broad or uses generic descriptions, the lender may be able to seize more assets than you intended, or assets you didn’t use the loan for.
An example could be that you’re using a loan to finance new puff irons, leg presses, and rotary form finishers for your dry cleaning business. If the UCC-1 filing description says “dry cleaning equipment,” the lender would be able to seize any of your equipment, not just the 3 items you bought.
Whenever possible, have the lender use unique identifiers like serial numbers, VINs for vehicles, or at least model numbers. This way, the lender can only claim the specific pieces of equipment and not seize other parts.
Pro-tip: Avoid “blanket” UCC filings that aren’t needed for equipment financing. These give the lender rights to all of your assets and make it harder to get other loans.
Another way to prepare for the UCC-1 form process is to do your own search for UCC filings before getting an equipment financing loan. Check your Secretary of State website because bogus UCC filings happen and can hurt your chances to get a loan. As an example, here’s where California lets you search. Check your state’s site regularly because even if you don’t need a loan now, clearing up bad filings takes time you might not have when you need a loan.
If someone did a false UCC filing on your company, file a UCC-5 form with your Secretary of State. It won’t terminate the fraudulent claim, but it puts your protest in public record and lays the groundwork to begin legal action.
UCC-3 Filings Tips
If you’re not missing payments and the lender is considering you reliable, you may be able to get them to amend the UCC filing. By removing some of what they can claim, you open yourself up to more financing options because new lenders will now be able to list assets on their filings. This is done through the UCC-3.
UCC-3 filings are for making changes to details from the original UCC-1 statement, and there are 4 main reasons why your lender should file one.
- To change details about the collateral
- To transfer the claim on the collateral to someone else
- To extend the filing
- To terminate their claim
In addition to your reason for wanting to have a UCC filing amended, lenders may have their own. As stated above, the first reason is so they can make changes about the collateral on the loan, which can include asking you to add more collateral to the filing, or you asking them to remove some of their claims because the equipment you purchased with their financing is now worth more than what is owed on the loan.
This process is easy if you were specific in the original UCC-1 because you can just remove equipment serial numbers. However, if you were general in your original description, you may have to work with your lender to find a way to describe “less dry cleaning equipment,” for example.
If you didn’t include unique identifiers in a loan you have outstanding, go back to your lender and ask them to file a UCC-3 that changes the description to include specific serial numbers. You will also need them to file a UCC-3 if you want to sell the equipment and the original UCC-1 says their approval is required to sell.
Lenders also use UCC-3 to transfer their rights to the collateral. This happens if they sell the loan, if a larger bank buys their business, or if they sell only the legal claim (but not the loan) for cash. There’s nothing to worry about in these instances, as these changes don’t change your loan or the collateral. However, it’s good to get contact information for representatives of the new lender so you know exactly who to call in case of a problem or needed changes.
Extending their claim is another reason lenders use UCC-3 filings because an original UCC-1 expires after 5 years. Keep a close eye on the resale value of your equipment as the UCC expiration date approaches. If it’s higher than what you owe, get the lender to file a change to the collateral description (using less collateral for the loan) in addition to the extension. You’ll see the date each claim expires on the Secretary of State website (it might be called “lapse date”).
When you pay off the loan, the lender should file a UCC-3 to terminate rights to your equipment. Most lenders will do this automatically and you’ll get official notice in the mail. However, it doesn’t hurt to set a reminder to check public records because mistakes can happen, either with the lender or with the Secretary of State.
If the termination doesn’t happen or you’re worried that your lender might delay, send an authenticated demand that gives them 20 days to terminate the UCC filing. If the 20 days pass, you can file your own UCC-3 with the Secretary of State to have the filing terminated.
UCC filings in equipment financing loans are simply another layer to your loan agreement. Ready for a lending partner to help you upgrade your business? It’s easy to see how much financing you qualify for with National Funding.