Lenders use UCC filings, which are publicly accessible, to show which assets from your business they can claim as collateral if you default on your small business loan. When you’re ready to take a new loan, the new lender will see someone else already has a UCC filing on your assets, making you a higher-risk borrower. Because there is less they can claim if you default, they’ll likely require a higher interest rate on your small business loan.
UCC filings can also lower small business loan interest rates. If your business has grown and you have new assets to use as collateral, allowing the new lender to list this on the new UCC filing makes you a less risky borrower and gives you the power to negotiate a better interest rate.
As you can see, UCC filings are nothing to worry about. They are common practice and knowing how they work can help you get better interest rates on business loans. Want to learn more? This quick guide to UCC loans and interest rates will help you be prepared to counter high interest rates and negotiate better terms.
Higher Interest Rates Due to UCC Filings
Lenders might charge higher rates when they are the second or third lender to submit a UCC filing, because they have to wait in line to get paid in the event you default.
The filing date determines a lender’s place in the repayment line, so the first lender to file a UCC gets paid first, and then it progresses in order. The second and third lenders also risk not getting paid at all if the collateral’s value drops and all the money goes to the lenders ahead of them. In order to reduce the risk of not being able to recoup their investment in a default situation, they’ll charge a higher interest rate on the loan.
Don’t worry if you already have a loan with a UCC filing. You can help keep interest rates down by avoiding “blanket” UCC filings, which means the lender filed a general claim against all your assets instead of specific ones. The following tips can come in handy as the UCC filing is being created:
- If a lender already has a “blanket” UCC filing, ask them to amend the filing and use specific assets instead.
- Be as specific as possible and use serial numbers, VIN numbers, SKU numbers, etc. whenever possible so that there is no confusion over which of your assets lenders have rights to if you default.
- Make sure lenders terminate UCC filings when you pay off loans. Most will, but mistakes happen. You don’t want to apply for a new loan only to find out there’s still an old UCC filing hanging around.
UCC Filings Might Help Get Lower Interest Rates
In situations where you’ve experienced growth and need to invest in new machinery, expanded facilities, or new locations, you may need a new small business loan. If you’ve already started to grow and have more machinery and assets that can be used for collateral, you have an advantage.
Instead of relying on the existing UCC filing from your current loan, share the new assets the lender can add to their UCC filing to help negotiate lower interest rates on the new loan. Two strategies include the following:
- Ask the lender about their UCC filing requirements and whether they plan to submit a filing for the loan you want. If they are not planning to submit one, you can offer it in exchange for better terms.
- If the lender does plan to file on the collateral you’ve already committed, you can try offering up additional assets for a UCC filling, especially if you have assets like bonds, CDs, or other investments that are fast and easy to sell.
UCC filings are nothing to be nervous about. Yes, they can increase your interest rates on a second or third small business loan, but they can be used as negotiating tools to lower interest rates too.