The Uniform Commercial Code was created to make it easy for companies to conduct business across the United States. The part of the UCC that most affects small and midsize companies has to do with secured financing transactions. When a bank, credit union, nonbank lender, leasing company, or trade vendor provides a company with credit, it often files a UCC-1 financing statement, also known as a lien. This public document puts all other lenders and creditors on notice that the collateral specified in the UCC-1 filing is secured.
UCC-1 filings specify which of your business assets are securing the credit for a given loan. It’s not unusual for a company to have several UCC-1 financing statements filed against it, each naming a specific asset. Typically, for example, accounts receivable lenders secure accounts receivable and inventory. In an equipment lease transaction, the specific piece of equipment and all leased attachments have a UCC-1 filing against them. Lenders that want to secure their loan with all of your company’s assets file “blanket” UCC-1 statements.
Small Business Administration lenders normally file blanket financing statements, which doesn’t leave any collateral (such as accounts receivable) available for working capital loans. It’s important to try to anticipate in advance what your borrowing needs might be and how the collateral is going to be assigned. SBA lenders are often unwilling to release a class of collateral once it’s been assigned; therefore, if you need your accounts receivable for a working capital loan (which the SBA lender isn’t making), it’s best to negotiate both loans at the same time and discuss with each how the collateral is going to be pledged.
Keeping Track of Secured Assets
As a business owner, you should know what UCC-1 financing statements your creditors have filed. Nearly all states make this process simple and inexpensive by allowing anyone to go online and search the secretary of state’s office records for UCC filings. A business can’t file a UCC-1 financing statement against your company unless you have given it written permission to do so. Sometimes the small print of a credit application provides authority to file a financing statement, so it’s important to read any application for credit carefully.
When a lender files a UCC-1 financing statement, it’s date- and time-stamped by the county clerk and the secretary of state. The date and time determine which creditor has first rights over an asset that’s being financed. If two blanket UCC filings are made, for example, the one stamped first has first lien rights. If the first creditor’s loan is paid off, the second lien creditor automatically moves into first place.
The worst time to find out you have a UCC-1 filing is when you’re about to secure a new loan and the new lender conducts a lien search and finds it. Your loan request has to be put on hold until you secure a termination or an agreement to subordinate part of the collateral of the first lender.
Terminating UCC-1 Filings
Once your company pays off a secured loan, you should immediately request that the lender terminate its UCC-1 filing. If you fail to ask for a termination, the filing will expire five years from the date of filing. For loans exceeding five years, a lender must file a continuation before the end of the five years to maintain its status as a secured lender.
Sam Thacker is a partner in Austin, Texas-based Business Finance Solutions.