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.
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The Goal of the UCC = Eliminate Confusion
Before the Uniform Commercial Code (UCC), there was marketplace chaos in relation to business transactions involving multiple states; for example if you had a good created in one state, stored in another, sold in another, and then delivered in another. As a result, the UCC was created to standardize this process by creating more harmony and uniformity.
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.
The Composition of the UCC
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)
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 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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Delaying or Denying Your Business Financing Because of UCC Filings
If not properly managed, UCC-1 liens could delay or flat out deny your ability of obtaining higher quality forms of business financing. 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 results of your current lender’s public records search uncovering 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 Word
Lenders competing for borrowers might use the UCC as a marketing tool, using public records to find customers that are already familiar with their lending products to pitch them lower priced 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 your ongoing attention to the presence of UCC filings. 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.
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