UCC liens are common public records that give a lender the right to obtain and sell a borrower’s assets if they default. But don’t worry if you see them, as they are standard practice. However, if a business has too many UCC liens, it makes it harder to get a loan, as there are less assets available to secure a loan investment. Other times, a lender may charge a higher interest rate because they see you as a riskier borrower.
Higher interest rates directly hurt your cash flow because you have to spend more each month on interest payments. More difficult loan approvals indirectly hurt cash flow by making you miss out on growth opportunities when not approved, or they simply take time away from your operations as you focus on applying for financing vs. making money for your business.
When you apply for a new loan, the lender will search for existing UCC liens on your assets and won’t let you use assets with liens as collateral, since another lender already has the right to it. Sometimes the value of an asset is more than what you owe. In this case, a new lender might let you use it as collateral, but they’ll likely charge you a higher rate since they will only get paid from the amount left over after the existing lender gets paid.
UCC liens are a regular part of the loan process that helps lenders manage their risk. Without a UCC lien, the lender may charge higher interest rates or require more money down, reducing your cash flow.
The good news is there are ways to manage UCC liens so that they don’t cause as many potential cash flow issues when you’re applying for a small business loan.
Tips for managing UCC liens to minimize cash flow impact
Actively monitoring and managing UCC liens in the public records can minimize any hit to cash flow by making sure the existing liens are accurately recorded and by fixing any errors that could prevent you from getting a new loan or cause you to pay a higher rate.
UCC-1 forms
Specific descriptions on UCC-1 forms ensure current lenders can’t seize assets you didn’t promise them. They can also make future lenders feel more confident when loaning you money, since they’ll easily be able to see which assets do and don’t have a lien against them.
A UCC lien starts with the lender filing a UCC-1 form, including the description for the asset you’re using as collateral. Make sure this description is as specific as possible and use unique identifiers like serial numbers or VIN numbers.
Here’s an example if you own a trucking company with 10 semi-trucks (5 of them being 10 years old and 5 of them being less than 1 year old and top of the line).
| Vague Description (don’t use this) | Specific description |
| Two semi-trucks, including all attachments, equipment, accessories, substitutions, and replacements thereof | One (1) Peterbilt semi-truck, VIN 1XP5DB9X5YN532846, and one (1) Mack semi-truck, VIN 1M1AN07Y4FM021973, together with all attached parts, accessories, and equipment integral to said vehicles. This financing statement applies solely to the above-described vehicles and expressly excludes any after-acquired equipment, trailers, or other property not permanently affixed to or integral to these vehicles. |
The vague description would allow the lender to say that they have claim to your top-of-the-line trucks in case you default, but the specific description including the VIN numbers identifies the exact trucks. Future lenders then know which of the remaining 8 trucks you can use for collateral on a new loan, potentially increasing your chances of approval and getting a good rate, which can help with cash flow.
Blanket UCC liens
Blanket UCC liens give lenders the right to all your assets and possibly future purchases, including the right to garnish your business income, which could devastate cash flow. Avoid signing one of these unless you are in a no-other-option type of emergency, because future lenders will view you as a higher risk. You may still get financing, but any funding will likely come with higher interest rates, the need to pay larger deposits, and/or the requirement of a personal guarantee.
When you must use a large amount of assets, be as specific as possible, even when you don’t have unique identifiers. Model numbers, UPC numbers, and item counts and weights are better than general statements.
Here are some examples of specific descriptions using these other identifiers:
- Five (5) Functional Trainer Smith & Squat Rack Machines, Model # FF-FSR90
- 1,000 16-ounce bottles of body wash UPC code 037000167709
- 500 pounds 24-gauge (AWG) solid bare copper
UCC lien termination
Lenders should file a UCC-3 form to terminate a lien when you pay off your debt, but mistakes happen, so keep detailed records and actively confirm they’ll terminate the lien upon the final payment.
To be more proactive, before making your final payment, contact the lender and get confirmation they’re filing the UCC-3 termination. Then double-check to make sure this happens by checking with your Secretary of State or by searching their website, like this one for California.
If you don’t see the termination and the lender is uncooperative in fixing the issues, send an authenticated demand that gives them 20 days to terminate the UCC lien. If they haven’t terminated it after 20 days, then you can file your own UCC-3 with the Secretary of State to have the lien terminated.
Pro-tip: UCC liens expire after 5 years, so keep detailed records and follow up with your lender, if needed.
UCC liens are normal in business. While they can affect your business, this is more common when errors happen, when you are not specific in listing assets, or when the liens are mismanaged. When you keep detailed records, proactively manage the UCC filings together with your lender, and follow the tips above, you can minimize any hit that a UCC lien has on your cash flow.
National Funding does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors.
