There may come a time when in looking over your business credit report you come across what is called a UCC Filing. Many small business owners are often confused by such a notation in their credit report. The problem then becomes that when the business goes to try and qualify for business loan financing, this could adversely affect their ability to qualify for any sort of funding. That is why it is crucial to understand exactly what a UCC Filing means for your business credit.
Understanding UCC Filings
So essentially what a UCC Filing entails is a legal notification filed against a small business owner's assets. A creditor or lender might file a lien against one of your assets to secure financing. UCC stands for uniform commercial code. And the filing is done by the secretary of state's office. These are also made public. This way a lender can have a better understanding of a company's creditworthiness and consequently take the necessary action in the event a business defaults.
The Uniform Commercial Code (UCC/) was initially created to more effectively contain the sale of goods in the US. Because the US economy has grown exponentially, the government saw a need to regulate business transactions across states as many states were abiding by differing regulations—the UCC was thus meant to establish a more uniform practice across the board.
Liens that affect your business
There are two types of liens that lenders can place on a business: blanket liens and specific collateral liens. In terms of the specific collateral lien, the lender will place a lien on certain assets that the business pledges. For example, this might involve equipment, property, or inventory. So let's say you take out a loan for a bulldozer; the bulldozer itself would be the specific collateral used in this instance to secure the financing. A blanket lien, on the other hand, just as its name suggests, covers most (if not all/) of a company's assets. Therefore, if a business does default, the lender can seize anything included within that blanket lien to recover the money. Both of these fall under the UCC-1 filing.
So why a UCC-1 filing?
Both types of liens, per a UCC-1 filing, are put in place to protect the lender. Before granting a business loan, the lender will perfect a UCC-1 filing so that in the instance of default, their interests are to some extent safeguarded. Keep in mind, all parties involved with the loan contract must agree upon the assets that can be seized to comply with the Uniform Commercial Code. Once the filing is done with the secretary of state, it is made public. The lender can then use this record (if the need arises/) to obtain a court order for seizing the agreed-upon assets. Also remember, this does appear on your business credit report. Should you go for other funding, this could be a factor as far as whether or not you are approved—especially if you've previously defaulted, this will probably make it very difficult for your company to procure any additional commercial financing.
How a UCC filing affects your business over the long term
So what does it mean if you have a UCC-1 lien on your credit report? This could be a red flag when you go to apply for additional and/or higher forms of funding. What a UCC Filing suggests is that the lender who filed it had some questions regarding your creditworthiness. And even once you do get that particular loan paid off, that filing can stay on your business credit report for several years. Not to mention, once you do pay that debt, the lender may not automatically terminate the lien. If such UCC-1 liens are active in your report, this could seriously hamper any future efforts to get financing for your company.
Having this lien on your report also lowers your business credit score, and so again, when analyzing your credit report, in tandem with the fact that that lien is listed on there, your score is negatively impacted. In some ways, it becomes a bit of a vicious cycle. The lender who has the oldest UCC Filing is considered to be in the first position in terms of having a claim to pledged assets. That said, subsequent lenders generally are not fond of taking positions other than first. Yet again another roadblock to procuring any future funding. All in all, even after the debt is paid, it could take up to six weeks to remove the UCC-1 lien—so do keep that in mind as well.
If you do need to get funding for your company the first thing you want to do is to review that credit report. Check and see if there are any active UCC-1 liens in place that shouldn't be, as you've satisfied the debt. And as soon as you have paid off a loan, you want to be on top of ensuring that the lender does go ahead and remove the lien on the pledged assets. As again, they may not do this automatically.
In conclusion…
Your ability to get business loan financing depends largely on how you look on paper. And a UCC Filing can be a checkmark against your business in that respect. Let's say, for instance, you do manage to find funding that will enable you to expand and grow the business. However, everything gets delayed or outright stopped because of the existence of a UCC Filing on your credit report. This of course is the last thing you want to happen. Stay on top of any liens, keep in contact with the lender once the loan is paid off, and make sure you understand exactly what is on your credit report at any given time.
First Union Lending is invested in helping small business owners take their companies to the next level. Our loan programs are fast and flexible—with some clients receiving the funds in as little as two days. If you are looking for a short term loan or line of credit (among other financing solutions/), we can help. Call today!