How UCC Filings Can Affect Your Business Credit Scores

How UCC Filings Can Affect Your Business Credit Scores

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If you have reviewed your business credit reports or scores, you may have seen reference made to something called “UCC filings.” 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.

(Editor’s note: You can use Nav to review your credit reports to identify UCC filings that may affect your business credit and loan applications. Sign up for free now.)

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 is a UCC filing and the UCC-1?

When you are approved for secured financing, a lender will file a UCC-1 financing statement with the secretary of state (SOS), creating a lien against the asset(s) in particular (unless the lender files a blanket lien naming all assets) that’s being used by the borrower to secure the financing. The term “UCC filing” comes from the uniform commercial code.

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.

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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.

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.

Ready to see your credit data and start building better business credit? Check Your Personal and Business Credit For Free (No Credit Card Required).

This article was originally written in December of 2015 and updated in May 2018.

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About the Author — John Tucker has over ten years of professional experience in Commercial Finance and Business Development. Tucker is also an M.B.A. graduate and holder of three bachelor's degrees in Accounting, Business Management, and Journalism. To connect with John Tucker, feel free to send him a connection invite via LinkedIn at: www.linkedin.com/in/johntucker99

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6 responses to “How UCC Filings Can Affect Your Business Credit Scores

  1. How can I (or one of my clients) file a UCC Lien against another company for services/product rendered but yet to be paid for? I know there is Google, but is there a vetted source or link I can find out more about this?

    1. Hi Jake, it would likely be best to talk to an attorney about how to go about this. In order to file a UCC against another company for services/products rendered, you’ll need to include the right to file a UCC in your up front agreement with the company. Even then, the agreement might differ based on whether products or services are being offered.

  2. I work for a physician’s office and we have started filing UCC-1’s for 3rd party auto accident cases so the insurance company will pay our office instead of the patient. Once the account is paid in full, we terminate the lien. Will this show up on an individual’s credit report or adversely affect their credit in any way?

    1. I double checked with Rod Griffin, director of public education with Experian about your question. He replied: The only way the debt would come to an Experian credit report is if it were reported by a third party collection agency. We no longer include lien information in a consumer credit report, so it would not appear as a public record in that way. So, it should not affect the consumer’s credit history in any way.