When a lender makes a secured loan they file a Uniform Commercial Code (UCC) document in various state and local jurisdictions indicating their collateral interest in the borrower's assets. All business owners should have a basic knowledge of several UCC documents often used by lenders.
The Uniform Commercial Code (UCC) is a series of uniform regulations designed to streamline commerce between businesses across all 50 states and various territories of the
The most important UCC form small businesses are affected by is a UCC-1 form also known as a Financing Statement. A Financing Statement is filed to perfect a security interest in named collateral and establishes priority in case of debtor default or bankruptcy. All lenders in the
Before a lender makes a secured loan in which it intends to file a UCC-1 form, it does a lien search to make sure there are no other UCC-1s filed against the piece of collateral being financed. If several lenders have filed UCC-1s against the same piece of collateral, the one that shows the oldest file date/time stamp on it is considered the 1st lien. Priority of a lien is determined by the date/time it is received at the Secretary of State’s office. Unless negotiated in advance, a lender generally will require it to be in the first lien position. Depending on the type of financing, a lien may be filed against a very specific asset (i.e. piece of equipment with serial number), or it can be what is known as a blanket assignment. A blanket assignment is one in which the lender has named all of a company’s collateral in it.
Let’s say for instance, a business borrows from a bank using an SBA loan. The SBA routinely requires a blanket lien, so that would mean a second lender would not be able to assist the borrower with working capital, because the asset of accounts receivable is part of the SBA’s blanket lien. SBA loans only have a small amount of a loan which can be borrowed for working capital, so SBA loan customers often find themselves with their long-term assets financed, but don’t have enough working capital. In order to obtain a second loan for working capital, the SBA would have to subordinate its interest in accounts receivable so the second lender could be in the first lien position on that asset. Getting lenders with existing financing agreements filed to subordinate can often be a time consuming and frustrating experience.
When it is clear a business will need both capital for equipment or other long-term asset and also working capital, it is most advantageous to negotiate both loans up front and make sure the two lenders are comfortable with each other.
UCC-1 Financing Statements do not have to have the borrower’s signature on them, so be aware that some finance companies and banks have small print in their application document which is signed by an officer of the company granting the lender to file a UCC simply upon application. If you don’t end up using that lender, you may have to pay fees to get the UCC released, so be careful about reading the small print on applications and don’t grant a potential lender the right to file a UCC-1 until you have agreed to use that lender.
UCC-1 Financing documents may be assigned or amended if your loan is sold to another lender, or if the original lender is acquired. Financing statements often name a corporate name and d/b/a name if one is used, and the primary loan guarantor on the loan. In the case of a parent corporation that has multiple entities it owns, the Financing Statement may list all subsidiary companies.
When a loan is paid off, it is the borrower’s responsibility to ask the lender to terminate its UCC-1 filing. Make sure you do this in a timely manner, because with lender mergers and acquisitions records often get lost and it may take time quite a bit of time to get the successor lender to search all their records and terminate an old “orphan” UCC that has been paid off.
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