Maintaining a satisfactory business credit report is one of the most crucial aspects of running a small business. With a good credit history, companies can qualify for comprehensive loans, better loan terms, attract investors, and most importantly, grow. As a business owner, your credit background will determine how financially capable your business is in managing your finances. Essentially, the better and varied your credit background is, the better your financing options will be and the more opportunities will be available to you.
If you’ve been in the business long enough, then you might know some of the basics in building and improving your credit background. Repaying debts on time, opening new accounts, and working with suppliers that report immediately to the credit bureau all reflect positively on your credit report. Aside from that, business owners should also review their credit reports once in a while.
The UCC filing section is one of the things you should be familiar with when reviewing your business’ credit report. Since you’re looking to be approved for financing, checking your credit report is important. While some may already have a good grasp on it, others still have a lot of questions about it.
With that, we’re going to get an in-depth talk about what UCC filing is all about and how it affects your business.
What is the Uniform Commercial Code (UCC)?
The Uniform Commercial Code or UCC is a body of law or set of codes that regulate and govern all business transactions within the United States. It’s important to note that this broad statutory program only focuses on small businesses, as well as other entrepreneurial transactions.
In 1942, U.S. businesses had encountered a lot of problems. This prompted the government to create a code that would govern all the transactions made between the states. The establishment of the UCC resolved the following business issues:
- The chaotic business dealings which stemmed from lack of regulation and competing interests.
- Different states had different business laws to follow. With that, there were conflicting interests between businesses. This made entrepreneurial transactions, even more, challenging between states.
The increasing issues brought about the need to create a uniform standard or code that all businesses in the United States should abide by. This made business transactions made from business-to-business easier for people across states. For instance, a business in Chicago wants to apply for a business loan in another city. Before 1942, this would have been nearly impossible. With the creation of the UCC, the small business now has the chance to apply for financing in different states.
The UCC contains 11 articles that are further divided into separate sections. Each of the articles guides businesses and the transactions they make. Here’s a short overview of the different codes:
Article 1. General Provisions
This section in the UCC primarily talks about the definitions of terms in the code, as well as the parameters in which the code can operate.
Article 2. Sales and Leases
Article 2 contains the regulation of the sale of goods in all states. Section 2A specifically talks about property leases.
Article 3. Negotiable Instruments
The section talks about the different guidelines regarding drafts (checks, promissory notes, etc.) for payments. Negotiable instruments are only acceptable if its ownership can be transferred to another person or institution. It should also remain enforceable against the other party who originally issued the premise to pay.
Article 4. Bank Deposits and Collection
The regulations for check and payment processing are discussed in this section. Section 4a, in particular, talks about the rules applied in fund transfers, but excluding funds transferred through electronic means.
Article 5. Letter of Credit
Letters of credit refer to the statements banks or other lenders issue to guarantee the buyer’s payments to the sellers. Article 5 provides the code regarding the use of a Letter of Credit, as well as its parameters.
Article 6. Bulk Transfers/Sales
Article 6 talks about the regulation regarding the liquidation of assets. A lot of states have come forward to state that this article is obsolete. The Uniform Law Commission then moved forward with the request to remove this article.
Article 7. Documents of Title
Included in this section are bill of lading, paper, and electronic warehouse receipts, as well as other documents that represents an underlying set of goods.
Article 8. Investment Securities
This section discusses the securities through intermediaries. It provides the general rules and provisions regarding the investments involved in the transaction.
Article 9. Secured Transactions
Article 9 allows and governs the borrowing of money against the purchase of goods. This section mainly talks about the regulations regarding collateral.
The National Conference of Commissioners on Uniform State Laws (NCCUSL) is the branch designated with the maintenance of the Uniform Commercial Code (UCC). Although some states have adopted their version of the codes, it still retains the main idea of the UCC.
What is a UCC Filing?
UCC is a standard legal code that regulates business transactions from state to state. UCC stands for the Uniform Commercial Code. A UCC filing is one of the most important things to understand when you’re reviewing your credit report. In case you didn’t know, it can affect a business’ credit score. Entrepreneurs need to understand what UCC filings are and how they work. This way, they can avoid problems that could hinder their ability to apply for business financing.
Banks and alternative lenders usually fine a UCC-1 when they approve a business of a loan. It’s a standard procedure among financing institutions as it helps them secure the loan the company took out. UCC-1 filing serves to protect their interests by laying claim on assets that the borrowing party presents to guarantee the loan. Although the concept seems scary for others, it’s often necessary to develop and hold some trust between parties.
All UCC forms filed are then sent to the Secretary of State office. With that, the document is then made publicly available allowing the lenders or investors to have access to it. From there, lending companies then can assess how much risk they’re facing if they approve the business loan application. Furthermore, the UCC filing can help lenders take action in case the borrower defaults on the loan.
What is a UCC-1?
The main purpose of the UCC-1 is to protect financing companies in doing business with small business owners. When a business applies for a loan, the lenders file a UCC-1 claim to the Secretary of State to protect them from the risks. In this arrangement, the borrowing party must pledge a specific asset in which the lender can file a lien. Once that is done, the asset is then tied up to the loan, completely protecting the lenders from risks.
Once it’s filed, the lien will then reflect on a business’ credit report. If they apply for secondary financing, the lenders can check their credit history for any liens or UCC filings. From there, they can determine whether they can qualify the business for the loan or not.
The UCC-1 only has a validity of 5 years. So, if the loan isn’t paid within that period, the lenders may have to file for another UCC-1 to extend the lien. By checking their credit reports, businesses will be aware of whether the liens were filed or removed.
2 Types of UCC-1 Liens
There are two categories of UCC liens: blanket and collateral lien. Each plays a different role and businesses need to understand how it works.
Specific Collateral Lien
As the name implies, this type of lien only makes use of a single asset. This means, only one of your company’s property guarantees the loan you took out. It’s usually the type of liens used for small business loans like equipment and inventory financing.
For instance, if a construction company borrows money to purchase expensive equipment, such as a bulldozer, the equipment itself will act as the guarantee for that loan. In the same way, the inventory of business will serve as the asset pledged upon taking out inventory financing. In the event of default, the lenders can only seize the pledged properties or assets.
On the other hand, blanket liens use a lot or all of the company’s properties as collateral for the loan. Since the debtor now has less or no assets to pledge, he or she may have a hard time securing another business loan. If the entrepreneur defaults on the loan, the lender can take the assets and sell it to pay for the loan.
Collaterals Used in UCC Filing
UCC filing can only use movable assets. The collateral that is typically used is the following:
- Office equipment
- Letters of Credit
As long as the asset is a tangible item with some value, the lenders can use to guarantee the loan.
Once the asset ties up the loan, other lending institutions can’t use it anymore. Until the debtor repays the debt in full amount, the lien will stay tied up to the loan. This means that if the entrepreneur takes out secondary financing, he cannot use the asset as collateral again.
How Does the Process of UCC-1 Filing Work?
The lenders will only file the UCC-1 lien when a business has already been approved of the loan. UCC filing isn’t necessarily tedious. The financing statement the lenders send to the secretary of your state only contains this three information:
- Lenders’ information (name and address)
- Debtor’s information (name and address of the company or business owner)
- Asset/s pledged as part of the agreement
It’s important to note that in the case of unsecured loans, the lenders can file for a blanket lien on the company’s assets. Although it’s secured in a way, it’s still technically considered as an unsecured loan because the lenders can only seize the asset that the company owns. The lien cannot go through the corporate veil, thus, protecting the entrepreneur’s assets.
How Does UCC-1 Filing Affect Your Credit Score?
UCC filing does affect your business credit score. However, its effect depends on how well the entrepreneurs handle their financial responsibilities.
With that said, it can either lead to a poor business credit score, that is, if you fail to make payments or default; or it can lead to a better credit score if you’re able to manage payments on time. Even if there is a UCC-1 lien filed against your business assets and you make payments on time or have finished paying, there’s no reason for worry. UCC-1 filings let other lending institutions know that a business has a lien in place.
On the other hand, if an entrepreneur defaults on business loans, it could have a big impact on the business credit report. If the lending company takes action, the businesses could face the consequences, including the following:
- The bank or lenders that filed the lien seizes the asset pledged against the business loan. As a result, the business is left without equipment of inventory necessary for its operation.
- Missed payments could reflect on your credit report as default. This pulls your credit score way down, thus, affecting your chances of business loan approvals in the future.
One of the first things that lenders consider when a business is applying for a business loan is their credit report. Some lenders may be hesitant to qualify businesses with active liens. If a business defaulted on a loan with a lien placed against it, it could even lower your business credit score even more. Remember that with business loan rejection also comes a dip in your credit score.
Before applying for another loan, be sure that your business has no active liens. Check your credit report once in a while to make sure that UCC-1 liens were removed for the loans you’ve paid off. As an assurance, ask the lenders to terminate the lien they placed on your assets once you’ve completed the payments for your loan.
Can a UCC-1 Filing Limit the Financing Options You Can Apply For?
One of the common effects of a UCC filing is the inability of a business to secure another funding source. If an asset is tied up to an existing loan, other lenders know that they won’t be prioritized in case the borrower defaults. Because of that, the lenders may hesitate in granting you the loan.
For the lenders, having an existing UCC-1 increases the business’ credit risk. Financing companies want to make sure that companies will be able to repay the loans they took out. With collateral, the banks may find comfort knowing that they can seize an asset to pay for the loan. However, with it being tied up to another lender, they will be facing a big risk.
Removing UCC-1 Lien on Your Credit Report
Qualifying for business financing can be tricky. Banks and other lenders want to make sure that there are fewer risks involved in working with businesses. As such, you want to make sure that nothing will stop your business from getting a much-needed loan. However, with a UCC lien tied up to your previous loan, lenders may think twice about doing business with you.
If you want your UCC lien removed from your credit report, you have to pay off your loan. Once you’ve paid off all debts, it’s time to deal with the UCC lien removal. Since a UCC filing hinders potential opportunities in the future, you’d want to take care of it as soon as possible. But, how do you get rid of that?
Here are some ways that can help you remove UCC lien on your credit report:
1. Get in Touch with the Financing Company
While it’s easy to think that the UCC lien may be terminated automatically after you’ve paid your debt, it isn’t always the case with some lenders. UCC filings lapse after 5 years, and financing companies often don’t terminate a lien until that period has passed. In short, the UCC lien will stay in your credit report unless you do something about it.
The Uniform Commercial Code requires lenders to file a statement of termination within a month after the debt was settled. If the lender still hasn’t removed the lien on your credit report, you may submit an authenticated demand. This is a document that asks the lenders to remove the UCC lien on your credit report. The financing company then has 20 days to file a statement of termination to the secretary of state’s office.
Once the lenders work that out, they may send you a termination statement. You can then file this in the secretary of state’s office.
2. Visit the Secretary of State’s Office and Terminate the Lien
It’s also possible for the entrepreneurs to terminate the UCC lien themselves. If the lender still hasn’t filed a termination statement to the secretary of state after 20 days, businesses can file the termination themselves. Using the UCC-3 form, you can request for termination of lien in the secretary of state’s office. You need to check the box that indicates that the amendment of the lien is authorized by the financing company.
The secretary of state’s office may also make you swear under oath that you have satisfied your loans to the lenders. In situations where the debtors are found lying, penalties, fines, and even jail time could result.
3. Always Check Your Credit Report
There is a reason why you should make it a habit to check your credit report once in a while. Credit bureaus often make mistakes in people’s credit reports. If you find a UCC filing that has been satisfied but wasn’t removed, report it to the credit bureau immediately. The sooner you deal with this issue, the faster the process of the UCC filing removal will be.
Even if the lien was removed in your credit report, it may still show in the UCC search until the 5-year period has passed. But, it will also be indicated in the search that the lien has already been released and you’ve paid your debt. This will tell other lenders that the previous creditor doesn’t have a hold on the asset anymore.
How Can You Apply for a Secondary Financing with an Existing UCC-1 Lien?
Having an existing UCC-1 lien doesn’t take out your chances of being approved for a secondary loan. In fact, there are certain options that you can use to get approval for another loan.
- Ask the lenders if to remove some assets from the blanket lien. This is one of the things that business owners usually do to qualify for another financing. Oftentimes, the lenders may allow it. With an extra asset on hand, the entrepreneurs can then use it to apply for another financing plan.
- Find a company that accepts second lien positions. Businesses can also find lending companies that take on second-lien positions. Aside from relying on the blanket liens alone, the lenders also focus on the business’ capability to make repayments.
- Take out a loan to pay out the existing loan. Lending companies also offer loan types that will allow a business to refinance their existing loans and take out additional financing for their business needs. The loans are then combined in a single account. Once the assets are released, the business can then use the collateral to guarantee their new loan.
Why Do Small Businesses Have UCC Liens?
When small business owners apply for a business loan, the bank or lending institutions usually file for a UCC on your business. The document becomes public and this will let other financing institutions know that there is a UCC filed on the business. This, in turn, let the other financing institutions know that they will not be on the top priority for repayment, in case the borrower defaults.
UCC filings can affect your ability to take out another loan in the future. Because it becomes a public document, other lenders can look at it to check if the asset you used is tied up to another business loan. If it is, they will most likely reject your loan application. This, in turn, affects your business credit score.
Finally, don’t overlook the importance of checking your credit report regularly. Credit bureaus often make mistakes of not taking off filed liens against businesses even of the debts are already paid off. Remember that these liens can take a toll on your credit report if left unmanaged.