What Is a UCC Filing?
Knowing where you stand with your UCC filings can be an important step in improving your business credit history. If you are looking for small business loans and funding, it's essential to understand what these filings are and how they work. Read on for an in-depth look at UCC filings and how they affect your company’s ability to secure loans.
Background to the Uniform Commercial Code (UCC)
The Uniform Commercial Code or UCC is a set of laws that apply to all states in the US. Their purpose is to standardize how commercial transactions are conducted across the board. There are several different articles in these sets of laws, but here, we are most concerned with the first. Article 1 or UCC-1 deals with general provisions to protect the lender's interests should a borrower default. You can find out more about what a UCC filing is and how it works in the next section.
UCC Filing Definition
A UCC filing, also known as a UCC-1 filing or a UCC lien, is a legal notice that a lender files with the secretary of state when there is a security interest against one of the borrower's assets. These forms allow the creditor to lay claim to any collateral that the debtor pledges during the financing agreement.
To better understand UCC filings, here is a practical example. Say that a small business owner approaches a lender to supply equipment financing to expand a business. If this is approved, the lender can file UCC liens on the equipment. This means that if the debt is not paid for any reason, the lender has the right to repossess the equipment or other assets. When financing is obtained, the creditor can legally seize the collateral given by the borrower.
Filing the UCC-1 is not a complicated process. The lender needs to provide three key pieces of information regarding the financing agreement between the two parties. These are the debtor’s name and address, the creditor’s name and address, as well as an indication of the collateral. The lender may choose to identify specific assets or keep this section non-specific by naming all assets in a blanket lien.
There are guidelines as far as which assets can be listed with the UCC-1. Business assets, property, and real estate are some of the more common examples. The lender can also seize the borrower's personal assets, but there is a limit on what can be taken. In many states, personal furniture, clothing, and a certain level of equity in a vehicle or house may be exempt from creditors.
The UCC-1 filing is beneficial to lenders because it protects their interests. It is valid for 5 years, after which the lender has to renew the filing if they still require legal protection for the financing they have provided. It is also possible to make amendments to the UCC liens if the asset listing requires updating, for example. For the borrower, the filing may not seem to have much of an impact, but it can affect future business activities.
UCC Filings and Your Credit Score
Keeping track of your business credit score is critical for any company because it can affect its ability to obtain funding and expand operations at an acceptable rate. The most essential dimension of improving your credit score is your ability to repay business credit on time. UCC filings can also impact your business credit history, so you must not forget about them.
A UCC filing is not harmful and does not reflect negatively on the debtor. Should the borrower never file for bankruptcy or default on a loan, the assets listed on the filing are safe from seizure. The UCC filing does not affect the credit score, though it appears on the business’ credit history.
One of the most important things to note as far as UCC filings go is that they can influence the chances of a business securing funding at a future date. If you already have an existing UCC-1 filing for your business and approach another creditor, the new one can access the details when pulling up your business credit score. It is not possible to list the same assets on new UCC liens, and additional creditors may have a higher risk of not recouping their loan compared to the first lenders in the case of a default.
Once a debt is fully paid, it is the responsibility of the lender to cancel the UCC filing. Unfortunately, this does not always happen in a timely fashion. Having this outstanding listing on your business credit score does not always go well with potential lenders, as detailed above. Every business should, therefore, monitor its credit report carefully and ensure that UCC filings that no longer apply are promptly removed.
How to Remove UCC Filings
It is only possible to get rid of UCC filings when you have paid off the associated debt. The first thing you need to do is check your business credit history to identify which filings are still outstanding. You can also look through UCC filing searches since these are public records.
If you find any outdated filings, you can contact your lender to remind them to have the UCC-1 removed. All they have to do is file a UCC-3 termination form. If your UCC filing is still in place after this, there is grounds for you to file an appeal to the office of the secretary of state. Another available option is to deal directly with the credit reporting bureau to dispute any inaccuracies.
Obtaining credit for your business can propel you to grow faster. When you receive approval for financing, this can introduce a UCC filing on some of your assets. While this does not affect your business credit score, it can impact whether other lenders are willing to provide additional funding. Monitoring your business credit report is, therefore, a must, as is ensuring that outdated UCC filings are canceled.
GoKapital is a private lender offering business financing and real estate lending, as well as unsecured personal loans. You can contact us for more information and assistance.