What Is A UCC Filing? (2024)

A Uniform Commercial Code filing—or UCC filing—is a form of notice that lenders use when securing a borrower’s loan with an asset or group of assets. This enables lenders to seize the listed property as a way of recouping loan funds in the case of borrower default. UCC filings may cover an individual piece of collateral, or a lender can list all of a business’ assets and then only repossess what is necessary to pay off the defaulted loan balance.

How UCC Filings Work

UCC filings give lenders the first-position right to pieces of collateral covered by the UCC financing statement, pursuant to the Uniform Commercial Code. The Uniform Commercial Code is a set of uniformly adopted state laws that regulate U.S. commercial transactions, including financial contracts and other interstate business.

When a borrower takes out a secured loan or utilizes equipment financing, the creditor files a UCC lien that establishes its right to repossess the equipment or other assets if the borrower defaults. In the case of equipment or inventory financing, filings generally specify the underlying collateral, while other loans may warrant a blanket filing on all of the business’ assets. If the borrower defaults on the loan, the lender can seize the listed collateral to recoup the outstanding balance.

UCC-1 Financing Statement

A UCC-1 financing statement is a type of UCC filing that a lender files with the borrower’s secretary of state to formalize—or perfect—its right to underlying loan collateral. By doing so, the lender provides notice to other lenders of its security interest in the collateral. UCC-1 financing statements are effective for five years, so lenders must renew them to cover longer loan repayment terms. Lenders can also amend UCC-1s to update the collateral securing a loan.

When UCC Liens Are Used

UCC liens are used when a creditor wants to give notice to other lenders of its interest in a debtor’s property. A UCC-1 financing statement is generally filed with the debtor’s secretary of state when a loan is originated. Lenders can attach UCC liens to a wide range of assets, including:

• Inventory
• Large equipment
• Office equipment
• Real estate
• Vehicles
• Receivables
• Commercial instruments
• Letters of credit
• Investment securities

Types of UCC Filings

There are two types of UCC filings that can be used to secure collateral during financing. A lien can be placed against specific collateral—like an individual piece of equipment—or generally against a business’ assets. The type of UCC filing used may depend on the type of business loan, loan amount, lender, borrower creditworthiness or other factors.

UCC Lien Against Specific Collateral

Lenders can opt to file a UCC lien against a specific piece of collateral like a piece of equipment or real estate. This is sometimes referred to as a purchase money security interest (PMSI). Liens against specific collateral are most commonly used when a business owner purchases a piece of equipment or inventory with financing.

If the borrower defaults on the financing, the lender has first priority to repossess the individual item to recoup the outstanding balance. However, the lender cannot attach to the company’s other assets.

Blanket UCC Filing

A blanket UCC filing covers all of a company’s assets—not just a single piece of collateral. In the case of borrower default, the lender can repossess and sell assets equal to the value of the outstanding loan amount. UCC-1 blanket liens make loans more accessible to borrowers without big-ticket assets like equipment.

For that reason, blanket liens are extremely common and often used to secure SBA loans, business lines of credit and short-term loans from alternative lenders. Due to the broad scope of collateral, however, this type of UCC filing can make it more difficult for a borrower to qualify for future loans because all of their business assets are already encumbered by the blanket filing.

How UCC Filings Affect Your Credit and Ability to Obtain Financing

UCC filings are a normal part of getting a business loan that’s secured by collateral and don’t typically impact day-to-day business operations. That said, UCC filings do enable lenders to repossess collateral tied to the UCC-1 financing statement if your business defaults on a loan. Having outstanding UCC filings also can impact your credit and ability to obtain financing. In general, UCC filings can:

• Show up on business credit reports. UCC liens do not directly impact a business’ credit score. However, UCC filings from the past five years show up on a business’ credit report. This means future lenders can see existing loan balances, payment histories and liens—and this information may impact lending decisions. To better control the information on your business’ credit report, review it periodically to ensure old UCC filings have been removed.
• Limit how assets can be used to secure future financing. Having a UCC filing on a business’ credit report can make it more difficult to qualify for future financing. This is because lenders are less willing to secure debt if they only have a secondary position behind another creditor.
• Put collateral at risk of repossession. Business collateral subject to a UCC lien can be repossessed if the borrower defaults on the loan. By taking out a secured loan, business owners run the risk of having their equipment or other business assets seized.

If your business has UCC liens against its assets, it is still possible to get additional financing. Here are a few options to consider:

• Use other collateral. If your existing UCC financing statements only cover specific pieces of collateral, future lenders can instead attach to the business’ other assets.
• Ask the lender to release some assets. Alternatively, if your lender has a blanket filing against your business’ assets—and the value of those assets is far greater than your debts—it may carve out some items that can be used as collateral for future loans. That said, changing loan collateral typically requires refinancing the loan.
• Find a lender that will accept a second-position lien. A final option is to work with a lender that is willing to take out a second-position lien against one or more of your business’ assets. Keep in mind, however, that this is often difficult to accomplish—especially in the absence of excellent borrower qualifications.

How to Remove a UCC Lien

To remove a UCC lien, a borrower must first pay off the outstanding loan balance. Once paid off, the lender should release the collateral within one month by filing a UCC-3 Financing Statement Amendment with the secretary of state. This removes the UCC-1 filing and terminates the lien.

Notably, UCC filings typically expire after five years without express action by the lender. For that reason, many lenders do not actively terminate UCC filings—instead waiting for them to lapse naturally. To combat this, borrowers can submit a formal request to the lender to remove the lien. The lender then has 20 days to file a termination statement or send the borrower a termination statement to file. If no termination request is filed or sent by the lender after 20 days, the borrower can file a UCC-3 form requesting termination.

Frequently Asked Questions (FAQs)