What Is a UCC Filing and How Does it Affect My Credit Score?

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Every business owner wants to maintain the creditworthiness of their company, which means having a good handle on finances. Learning about regulations like the Uniform Commercial Code (UCC) can help you understand more about how to protect your company’s assets.

First published in 1952, the UCC is a long list of guidelines for states to use in governing business transactions. One of the UCC rules allows business lenders to use a legal procedure known as a UCC filing to stake claims on the assets you put up as collateral for loans.

Here are some important things to understand about UCC filings, their potential impact on your business and funding options that help you steer clear of them.

What Is a UCC Filing?

The more precise legal term for the submission of this form is a UCC-1 filing, so named because it’s described in Article 1 of the Uniform Commercial Code. It’s most commonly referred to as either a UCC filing or UCC lien. The form itself is called a UCC financing statement or UCC-1 financing statement.

A lender files this document with the office of the secretary of state where a borrower’s business operates. It serves as an official public notice to other creditors that the lender has a legal interest in a debtor’s assets. That means the lender has the right to take possession of any assets used to secure a loan until the debt is repaid.

What Assets Are Subject to a UCC Lien?

Small business owner has a UCC filing

There are two general types of UCC liens: liens against specific assets and blanket liens, which make nearly all your business assets subject to repossession.

Specific liens are commonly involved in the financing of business equipment. If you’re borrowing money to purchase restaurant equipment, construction equipment or vehicles, for example, the lender may claim the right to repossess those items if you default on the loan.

With a blanket lien, you risk losing much more. Lenders can file these claims on a wide variety of business property, including real estate, inventory, receivables (money your customers owe you) and investment securities.

Most states impose some limits on creditors’ ability to take your property. For example, as a business owner, your clothing and household furnishings are usually safe. You also get to hold onto some of the equity in your home and in one vehicle. On the business side, most states allow you to keep about $2,000 worth of business equipment and tools of the trade, along with the funds in tax-deferred retirement plans.

How Does a UCC Filing Affect My Credit Score?

Any UCC liens filed against your assets within the last five years will show up on your business credit report, which may affect your ability to borrow from other lenders. For example, the lender who files the claim will get first dibs on your assets. A future lender who discovers a UCC-1 filing in your credit report may be unwilling to give you a loan because you would be considered a risk. If your business went bankrupt, that lender would only be able to recover their losses after the first lender’s claims were satisfied.

How Do I Remove a UCC Lien?

Once you’ve paid off a business loan, your lender should release your business from any claims on its assets. They should do so by filing a UCC termination statement with the secretary of state’s office in your state. But sometimes there’s a time lag in this step, and it’s possible that outdated UCC filings will turn up in your business credit history. A good proactive step is to immediately ask the lender in writing to cancel the lien when you’ve made your final loan payment.

It’s also important to monitor your business credit history to check for any UCC filings listed in error. You can go to your secretary of state’s website and conduct a UCC-1 filing search on your own business, just as a lender would do when vetting your loan application. If you find a lien that shouldn’t be there, you can ask the lender to file the paperwork to remove it.

Is a UCC Agreement a Good Idea?

A business loan that requires you to put up collateral — and thus agree to the lender’s right to claim those assets if you default — may make sense if it provides access to funding at affordable rates that you couldn’t otherwise obtain. If you feel confident that your company’s revenue and cash flow outlook are solid enough to repay the loan, you may decide that your risk of losing your assets to a lien is minimal.

But if you’re considering this type of loan agreement, don’t overlook the potential impact of future circumstances — a seasonal slowdown, a natural disaster, a general economic downturn — on your ability to keep up with your loan payments.

Also, be aware that a loan involving a blanket lien can be especially risky to you as a business owner. Unlike a lien against specific collateral that typically applies only to the business equipment you’re financing through that loan, a blanket lien allows the lender to take so many assets that you could go out of business.

Another thing to keep in mind is that a lien may prevent you from selling any equipment, inventory or other collateral until you’ve repaid your loan.

Are There Other Financing Options?

You may be able to sidestep the risks of taking out a loan that generates a lien against your business property by using an alternative method of financing. One option is a loan that doesn’t require collateral. Online and alternative business lenders frequently offer a variety of these types of loans.

Two other funding possibilities are the Small Business Administration‘s SBA 7(a) and disaster loan programs, which permit no-collateral loans of up to $25,000.

You can also opt to acquire business equipment by leasing it instead of taking out a loan to purchase it.

Using your business assets as collateral for a loan is just one way to get funding for your business. A UCC filing against those assets involves some risk to you as a business owner, so weigh that risk carefully and explore all your options before you commit to this type of funding.

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