What is ucc in business?
If your business participates in interstate commerce such as moving goods or money, establishing contracts of leasing equipment, you are required to comply with the Uniform Commercial Code. These and other business transactions that are regulated by the federal government require compliance with a consistent set of rules. Basically, UCC rules govern how commercial transactions are handled throughout the United States.
Most states have adopted UCC rules to regulate financial business transactions. The code has nine articles that address different aspects of loans and the banking system. Each helps to make it easier for lenders to make loans when necessary.
Rules for UCC cover all types of commercial transactions for sales, leases and private financial arrangements. A UCC filing on your business is usually made to create a lien against property used as collateral. Typically, a UCC filing is required in order to secure private financing.
Generally, commercial transactions occur across state lines. For example, products might be manufactured in Minnesota, distributed in Tennessee and sold to a customer in California. Money from the sale, whether through a bank account or credit card, often occur between the customer in California and the distributor in Tennessee.
Each state may have different laws about on commercial transactions that leave little or no protection for each party that is involved. UCC achieves the goal of creating uniformity on how state law – from each state – handles the transaction.
A UCC filing is important for any business that has to borrow money from an out-of-state lender. You must also consider the importance of a UCC filing if you have to negotiate a lien.
Basically, a UCC filing on your business allows the out-of-state lender to have consistency for recording the security of your loan. Banks and SBA-approved lenders file a UCC-1 form with the state in which the loan agreement is executed. Typically, these loans require collateral of movable assets and the lender needs a way to secure with a public record of the transaction. Without a UCC, a lender risks having difficulties laying claims on the collateral if you were to default.
Concerning liens, a UCC filing works best for a business that issues credit for goods or services. For instance, your business might use credit to purchase office equipment. Article 9 of the UCC allows a business to secure payment from you for the purchase. If you fail to repay the debt according to the terms of an agreement, the lender can use the collateral as a form of repayment. They have the right to foreclose, seize or even sell the property.
Now that you know why a UCC filing on your business may occur, it is important to understand how it can affect your business. Under state UCC provisions when tangible business assets are used as collateral, a UCC filing creates a lien. Once established, you cannot dispose of the property before the debt to the lender is paid.
Items that may fall under a UCC filing include:
Other types of liens may include a mortgage on a building. A business vehicle may have a lien. Paying off the debt is the only way to remove the lien. You will not be able to get the deed on an office building or title to the company vehicle until the lien is paid in full. Your business is, however, allowed to use the building or vehicle while you are making payments.
Additionally, UCC liens must be perfected to be recognized as valid against other creditors or lien holders that may have an interest in your business. Perfecting the security interest refers to statutory requirements that complete a lien. Perfection occurs when a lien holder files the UCC-1 form with the Secretary of State where your business is located.
Typically, the filing statement details the lien, the lien holder's identity and your identity. This statement becomes public record where potential lenders can verify whether a conflict of security exists.
If there is an existing lien on a piece of equipment, you will need to pay it off before another transaction can use the same collateral. Otherwise, the transaction becomes invalid and the lender will not issue credit or approve your loan.
The systems in place regarding UCC filings enable potential creditors to view public records before approving a transaction. It is best to be upfront about the situation and use some other form of collateral before attempting to complete a commercial transaction.
There is one exception to this rule. A blanket lien – where the creditor has rights to all of your business assets – could release some assets with a written statement from the creditor. Generally, a release is granted in this situation when you are replacing the collateral with an equally valuable asset.
UCC rules provide an effective duration of UCC filings for five years. Creditors must renew the filing if the loan is not satisfied within that period. Failing to renew the UCC filing in a timely manner will result in a lapse and the lien is no longer perfected. Technically, the creditor could not challenge the lien in court.
Once you have satisfied the debt associated with a UCC filing, the creditor must file a UCC release form. Essentially, this serves as a termination statement regarding the lien. Any other creditor searching public records will see that there is no longer a lien on your business assets.
Funding has been tight for many small businesses because of the financial crisis. Access to credit nearly came to a complete halt for business owners who needed to survive the meltdown. A few years after the recovery began, there is still a level of risk aversion that can make it harder for your business.
Traditional financial institutions commonly reviewed collateral and cash flow statements when deciding whether to lend money. Alternative funding sources with more lenient requirements have become attractive to business owners. Even though these alternative lenders are more willing than banks to make business loans, they still want security in being repaid.
Therefore, they will use a UCC filing as a secured agreement for repayment. Accessing funds through these sources can offer many benefits to your business. Nevertheless, you must understand what the filing does for your business. If you decide to use accounts receivable as a secured asset, the UCC filing usually places a lien on the accounts.
UCC filings give lenders the first-position right to pieces of collateral covered by the UCC financing statement, pursuant to the Uniform Commercial Code. The Uniform Commercial Code is a set of uniformly adopted state laws that regulate U.S. commercial transactions, including financial contracts and other interstate business.
When a borrower takes out a secured loan or utilizes equipment financing, the creditor files a UCC lien that establishes its right to repossess the equipment or other assets if the borrower defaults. In the case of equipment or inventory financing, filings generally specify the underlying collateral, while other loans may warrant a blanket filing on all of the business’ assets. If the borrower defaults on the loan, the lender can seize the listed collateral to recoup the outstanding balance.
A UCC-1 financing statement is a type of UCC filing that a lender files with the borrower’s secretary of state to formalize—or perfect—its right to underlying loan collateral. By doing so, the lender provides notice to other lenders of its security interest in the collateral. UCC-1 financing statements are effective for five years, so lenders must renew them to cover longer loan repayment terms. Lenders can also amend UCC-1s to update the collateral securing a loan.
UCC liens are used when a creditor wants to give notice to other lenders of its interest in a debtor’s property. A UCC-1 financing statement is generally filed with the debtor’s secretary of state when a loan is originated. Lenders can attach UCC liens to a wide range of assets, including:
There are two types of UCC filings that can be used to secure collateral during financing. A lien can be placed against specific collateral—like an individual piece of equipment—or generally against a business’ assets. The type of UCC filing used may depend on the type of business loan, loan amount, lender, borrower creditworthiness or other factors.
Lenders can opt to file a UCC lien against a specific piece of collateral like a piece of equipment or real estate. This is sometimes referred to as a purchase money security interest (PMSI). Liens against specific collateral are most commonly used when a business owner purchases a piece of equipment or inventory with financing.
If the borrower defaults on the financing, the lender has first priority to repossess the individual item to recoup the outstanding balance. However, the lender cannot attach to the company’s other assets.
A blanket UCC filing covers all of a company’s assets—not just a single piece of collateral. In the case of borrower default, the lender can repossess and sell assets equal to the value of the outstanding loan amount. UCC-1 blanket liens make loans more accessible to borrowers without big-ticket assets like equipment.
For that reason, blanket liens are extremely common and often used to secure SBA loans, business lines of credit and short-term loans from alternative lenders. Due to the broad scope of collateral, however, this type of UCC filing can make it more difficult for a borrower to qualify for future loans because all of their business assets are already encumbered by the blanket filing.
UCC filings are a normal part of getting a business loan that’s secured by collateral and don’t typically impact day-to-day business operations. That said, UCC filings do enable lenders to repossess collateral tied to the UCC-1 financing statement if your business defaults on a loan. Having outstanding UCC filings also can impact your credit and ability to obtain financing. In general, UCC filings can:
If your business has UCC liens against its assets, it is still possible to get additional financing. Here are a few options to consider:
To remove a UCC lien, a borrower must first pay off the outstanding loan balance. Once paid off, the lender should release the collateral within one month by filing a UCC-3 Financing Statement Amendment with the secretary of state. This removes the UCC-1 filing and terminates the lien.
Notably, UCC filings typically expire after five years without express action by the lender. For that reason, many lenders do not actively terminate UCC filings—instead waiting for them to lapse naturally. To combat this, borrowers can submit a formal request to the lender to remove the lien. The lender then has 20 days to file a termination statement or send the borrower a termination statement to file. If no termination request is filed or sent by the lender after 20 days, the borrower can file a UCC-3 form requesting termination.
