If you have reviewed your business credit reports, you may have seen reference made to something called “UCC filings.” This could be affecting your business credit score. As someone who has been involved in the fintech industry since 2007, running my own one-man sales office providing merchant financing and merchant services to small business owners, I know they cause a lot of confusion. Failing to understand them can lead to issues down the road relating to securing approval for higher quality forms of business credit.
What is a UCC filing?
A UCC filing is a legal notice a lender files with the secretary of state when they have a security interest against one of your assets. It gives notice that the lender has an interest, or lien, against the asset being used by you to secure the financing. The term “UCC filing” comes from the uniform commercial code.
What is the Uniform Commercial Code (UCC)?
The Uniform Commercial Code (UCC) was created to govern the sale and leases of goods. As the U.S. economy grew, so did the need to regulate business transactions in a uniform way. The UCC was created to standardize the process of business transactions in multiple states by creating more harmony and uniformity.
The code in general is divided up into 11 articles, each containing language over various forms of commercial transactions:
Article 1: General Provisions (contains generic interpretation language)
Article 2: Sales (refers to the sale of goods)
Article 2A: Leases (refers to the leasing of goods)
Article 3: Negotiable Instruments (refers to commercial paper and promissory notes)
Article 4: Bank Deposits and Collections (refers to banking and collections)
Article 4A: Funds Transfers (refers to bank transfers)
Article 5: Letters of Credit (refers to letters of credit)
Article 6: Bulk Transfers/Bulk Sales (refers to asset liquidation)
Article 7: Documents of Title (refers to bailment of goods)
Article 8: Investment Securities (refers to securities and financial instruments)
Article 9: Secured Transactions (refers to the legal interests of creditors in secured transactions)
What does a UCC-1 mean?
The UCC-1 protects the interests of the lender in the case of borrower default or bankruptcy, in which said asset(s)would be foreclosed on, seized or sold off. The UCC-1 is active for five years, which means that a lender will need to renew the filing to keep interests protected for loan terms extending longer than five years. Amendments to the UCC-1 might also be filed to update secured asset listings.
Your business credit report will indicate if a lender you’ve worked with put a UCC filing on your report, and whether or not it’s still there. Check your business credit scores and reports for free with a Nav account.
How a UCC filing may affect your business and ability to get business financing
If not properly managed, UCC-1 liens could delay or flat out deny your ability of obtaining higher quality forms of business financing. This is because the presence of a UCC filing on your business credit report may indicate to lenders that your business isn’t financially sound. Even if you had a previous business debt obligation that was paid in full, UCCs can stay on your report for years. Once a debt obligation is paid in full, a lot of times a lender will not terminate the lien automatically, this means that you could be closing up a financing arrangement and receive a delay or denial at the 11th hour due to the existence of UCC-1 liens that are still active.
Having a UCC filed on your business credit report can have negative effects in general on your overall credit risk, scoring and other associated risk analysis, (across all three business credit bureaus) and can even kill your chances at getting financing for your business.
The lender with the oldest UCC-1 filing position is considered to have the highest “priority” in relation to claim on the asset(s). Most high-profile lenders prefer to be in first position and thus will not file after that of another lender. Sometimes it could take one to six weeks to get the termination of the old UCC-1 liens finalized, which could flat out deny your ability to close on your financing arrangement.
As a result, due diligence should be done before you apply for financing to make sure your business has no UCC-1 filings still active for debt obligations already paid. (You can do this by checking your business credit profile, which you can do for free on Nav.)
In addition, once a secured debt obligation is paid off, you should request immediately that the lender terminate the lien on said asset(s) through the filing of a UCC-3 form.
A final note about UCC filings
Lenders competing for borrowers might use the UCC as a marketing tool—because UCC filings are public records, lenders can use these records to find customers that are already familiar with their lending products to pitch them financing offers. Make sure to vet all prospective lenders carefully as well as understand their process of filing a UCC-1.
Remember that your ability to continue expanding your business credit profile depends a lot on how your business looks in the eyes of lenders, and this includes the presence of UCC filings on your report. It’s a heart-breaking situation to be in, where you are approved for the business loan that can fund the next big growth opportunity for your business, only to have it delayed or denied due to the active existence of old or inefficiently structured UCC-1 filings.