Qualifying for business financing is often a tricky process. To increase your chances of approval, a lender needs to believe that loaning money to your company is a smart financial decision. In other words, your business needs to have an acceptable level of risk in the eyes of a lender.
How can you achieve this level of creditworthiness for your business? Having solid business credit scores and a credible, established business with healthy profits is a great start. You can also check out this guide from Nav for more great tips.
Still, even if you think your business has all its financial and credit ducks in a row, you need to be aware of another potential obstacle which might hurt your chances for loan approval – the UCC filing.
What Is a UCC Filing?
A UCC filing, also known as a UCC lien or a UCC-1, is a financing statement which lenders can file against your business with your secretary of state. When you take out a secured loan, the lender may file a lien to protect the asset(s) you committed to secure financing. This might be a piece of equipment, a vehicle, property, or even a blanket lien naming all your assets.
A UCC-1 protects a lender’s interests for five years (unless the lender refiles) and will typically be included on your business credit reports. (Remember, you can check your business credit reports and scores with Nav.)
Keep in mind that UCC filings are public records. Therefore, even if a UCC lien doesn’t show up on your business credit reports for some reason, it might still come up if you apply for new business financing.
Why a UCC Filing Could Hurt You
UCC liens aren’t unusual in the world of business financing and, unlike liens on your personal credit, a UCC filing doesn’t indicate that you’ve done anything wrong. Nonetheless, future lenders might be hesitant to approve applications for additional credit until you satisfy your existing lien(s).
Why? Because an existing UCC-1 filing may increase your company’s credit risk from a lending perspective. It signifies that you already owe money to another lender and that your assets are already committed to someone else.
This is an important consideration because the lender with the oldest UCC-1 filing legally has the first claim on the assets. In the event of default, the lender who submitted the second UCC filing would only be able to recuperate funds from the sale of any collateral after the first lender has had the opportunity to do so.
You can learn more about UCC filings here.
Ways to Remove a UCC Filing
In a perfect world, a lender should remove a UCC-1 whenever you pay off the debt associated with it. Unfortunately, it doesn’t always work that way. You might satisfy a debt in full yet discover that the UCC-1 filing remains in place.
You can check your business credit reports and your secretary of state’s website to search for UCC filings against your company. If you discover an outstanding UCC lien which is still in place after you satisfy a debt, here are some steps you can take to remove the UCC filing:
1. Ask the lender to terminate the lien upon payoff.
When you pay off a loan, a good rule of thumb is to immediately submit a request with the lender to file a UCC-3 form with your secretary of state. The UCC-3 will terminate the lien on your company’s asset (or assets) and remove the UCC-1 filing.
Note: this may or may not trigger the removal of the UCC filing from your business credit reports. Dun & Bradstreet, for example, will not remove a closed UCC filing until receiving a request from a customer or until the lien has been inactive for 11 years — whichever occurs first. You should always verify.
2. Visit your secretary of state’s office.
If your lender fails to file a UCC-3 form after you satisfy a debt, another option you may consider is making the request yourself. To do so you will generally need to make a trip in person down to your secretary of state’s office. Once there, you will be able to swear under oath that you’ve satisfied the debt in full and wish to request for the UCC-1 filing to be removed.
3. Dispute inaccurate information on your business credit reports.
It’s a smart idea to keep tabs on your three major business credit reports and scores from Dun & Bradstreet, Experian, and Equifax. If you discover an outdated UCC filing on your credit reports which has already been released, you can dispute the mistake and ask the business credit reporting agencies to remove it from your reports. Keep in mind, however, there is no federal law requiring they do so.
Don’t Wait Until the Last Minute
Changes to your business credit reports and your state’s public records take time. If you plan to apply for new business financing soon, it’s wise to make sure you’re well-prepared for the loan application in advance.
Whatever you do, don’t wait until the last minute to try to correct an outdated UCC filing. It’s a mistake which might cost you a loan approval.
This article was originally written on January 2, 2019 and updated on February 8, 2023.