How to Deal With a Lien on Your Business: Understanding UCC Liens

When was the last time you applied for a small business loan or some other type of financing? When was the last time you dug around to learn more about your company’s finances? While some are not surprised at what they find, others are horrified when they realize there is a lien against their business or particular business asset.

This may sound scary. And guess what? It is. There is nothing good about a lien, (but it’s not always a super-bad thing). If you find yourself in this position, you need to find out who filed the lien, what it is for, and what options you have for dealing with it.

Is a UCC lien filed against your business?

A lender can file a UCC lien with your state’s authority governing business. If you have taken out a business loan in the past, you may have a lien against your business.

In fact, even if you have paid back your loan in full, it is possible that a UCC lien against your business may still exist.

The best way to determine if a lien has been filed is to contact your state’s Secretary of State office. Depending on where you live, you may be able to receive assistance over the phone. Most states also offer the ability to search online. Some states allow you to search for free, while others charge a small fee.

Answer these three questions

If you are concerned about UCC liens or if you simply want to learn more about what they could mean to your business, you should not delay in collecting additional information. Here are three questions you must answer:

1. What is a UCC lien?

First off, let’s start with the Uniform Commercial Code (UCC). This is a set of federal regulations for simplifying commerce between all states and territories. Without this regulation, it would be a challenge for borrowers and lenders from different states to do business. The reason is simple: every state has different regulations.

A UCC lien is what lenders use to protect their interests in the event that you file for bankruptcy or default on a loan.

Now for the interesting part--if you have ever taken out a business loan, it is likely that the lender filed a UCC lien against your business. This does not have anything to do with missing payments or defaulting on the loan. Even if you have paid in full and on time, every time, a lien may exist. And as noted above, there may be a lien even after you pay off your loan.

Here is an example: You used real estate as collateral to secure a bank loan. The lender, when underwriting your loan, will file a UCC lien to give public notice it has an interest in your collateral. This way, if you ever default on your loan or file bankruptcy, it is in line to receive the collateral.

Note: There is also something known as a blanket lien. With this, a lender does not file a lien against specific collateral, but instead against the company as a whole.

2. Why should you understand UCC liens?

A UCC lien may not sound like a big deal, especially if your company is financially sound. Even so, you should realize that this can have implications, such as slowing down the process of obtaining a small business loan.

Here is an example of what a UCC lien can do to your company:

Imagine your company took out an SBA loan for expansion (or some other reason). The SBA can file a blanket UCC lien with your state’s Secretary of State office. If the time comes to take out another loan in the future, the next lender will come across the blanket lien. As a result, the second lender does not have “first rights” to your collateral should you default or declare bankruptcy, which may discourage it from doing business with you. It is possible that both lenders can work together to negotiate mutually beneficial terms, but this is sure to slow down the process, if not halt it all together.

3. How is a UCC lien filed?

While not always the case, a lender usually files a UCC lien with your state’s Secretary of State office.

It is a common myth that a UCC lien can only be filed if you accept funds from a business loan. Some lenders include a lien against your company or a particular asset in the application. This means that a lien is placed even if you don’t move forward with the loan. If this happens, you will have to work with the lender to have the lien removed.

Note: A lender is not required to tell you it has taken out a UCC lien on your business. You are required to track this yourself.

Why it matters

It is possible you could go many years without knowing a UCC lien has been filed against your company. It is easy to get so caught up in the application and approval process, as well as how you will spend the money, that you overlook the lien.

A UCC lien comes into play in two distinct situations:

• When there is a lien, but you have no plans of filing for bankruptcy.
• When there is a lien, and you are going to file for bankruptcy.

A lien, even with no plans of bankruptcy, can slow down the growth of your business. When applying for additional financing, the original lien could make it difficult to obtain an approval.

Conversely, if you have plans to file for bankruptcy, you should know what type of UCC lien is in place. Does the lender have a lien against one particular asset? Does the lender have a blanket lien? This will give you a better idea of what they will come after in the event that you move forward with the filing.

Final thoughts

UCC liens can affect your business in many ways. The more you know about them, regardless of your financial circumstances, the better off you will be.