What is a UCC-1 Filing? How Do UCC Liens Work?

A UCC-1 filing is a form filed by your lender announcing a right to collateral—also known as a lien—on a secured loan. Your lender will file this form with your state’s Secretary of State office when the loan is made. UCC-1 filings can either be filed for specific assets—such as a commercial property or piece of equipment—or as a blanket lien covering all of the borrower’s assets. UCC stands for the Uniform Commercial Code, which is a set of rules that govern U.S. commercial transactions.

UCC-1 Filings Explained

A UCC-1 filing is a form filled out by a lender announcing a lien on a secured loan. A lien is the formal right of a lender to seize, foreclose and even sell the underlying collateral when a borrower fails to make loan payments. A part of the Uniform Commercial Code (UCC) pertains to secured loans—loans backed by collateral—made to businesses and individuals. Each state has its own implementation of the UCC rules, but because the rules are uniform, they don’t vary that much from state to state. UCC liens typically have a five-year term, after which they must be renewed if still active.

The information on a UCC-1 filing includes:

  • The creditor’s name and address.
  • The debtor’s name and address.
  • A description of the collateral.

The property serving as collateral is frequently real estate—such as a commercial building or individual’s home—but can also include vehicles, office equipment and fixtures, investment securities, inventory, receivables, letters of credit, and other tangible items of value.

When a lender files a UCC-1 with the appropriate Secretary of State—meaning the Secretary of State for an individual borrower’s residential state, or the state where a company is incorporated or organized—the lender is said to “perfect the lien.” Legally, this means the lender can enforce the lien in a state court with minimum fuss. In cases where the collateral is tied to a specific physical property rather than financial assets, the UCC-1 is filed in the county where the physical property is located. The UCC-1 becomes a public record, allowing potential creditors to see whether a given property is already pledged against an existing lien.

Note that the UCC-1 does not create a lien—that occurs when the borrower signs the loan agreement—but rather serves as a public record and reserves the lienholder’s place in line should multiple lenders sue for the same collateral.

When is a UCC-1 Filed?

Lenders typically file a UCC-1 when a loan is made rather than waiting for a borrower to default. If the borrower has loans from more than one lender, the first lender to file the UCC-1 is first in line for the borrower’s assets. This motivates lenders to file a UCC-1 as soon as a loan is made. The first UCC-1 filer holds a first-position lien, the second filer has a second-position lien, and so forth. Usually, the first-position lien must be completely satisfied before the second-position lien holder can receive any remaining collateral. In some cases, multiple lenders might work out an arrangement that leaves more collateral for junior lien holders. However, lenders typically will not allow a borrower to re-use the same collateral for multiple loans.

Types of UCC-1 Filings

The two types of UCC-1 filings are:

UCC liens against specific collateral: This type of lien gives creditors an interest in one or more specific, identified assets rather than an interest in all the assets owned by a business. These are most often used for inventory financing or equipment financing transactions.

UCC blanket liens: This lien gives a creditor a security interest in all assets of the borrower. This lien type is commonly used for loans from banks and alternative lenders, as well as loans guaranteed by the Small Business Administration (SBA). Blanket liens are preferred by lenders because they are secured by multiple assets and are therefore less risky. In some cases, a blanket lien might carve out some assets that will be exempt from the lien. This might occur if the remaining assets are more than sufficient to reimburse the lender should a default occur.

How Does a UCC Lien Affect Businesses?

A UCC lien can affect your business in three ways:

Prevents additional borrowing: Small businesses usually have limited property to offer as collateral. Lenders typically won’t offer additional credit to a small company with a blanket lien until the lien is removed. Borrowers facing this problem can attempt to get a carveout on the blanket lien, but these are relatively rare. One alternative is to refinance with another lender by paying off the first lenders, terminating the original lien, and getting a larger secured loan from the second lender. Another alternative is to find a lender willing to take a second-position lien or to make an unsecured loan.

Impacts business credit report: Your credit report will show all UCC liens for the past five years, including status, collections and disputed amounts. The existence of a UCC lien won’t hurt your credit score unless you've defaulted on a loan or it has gone to collection. The loan secured by a UCC lien increases your credit utilization ratio, which could hurt your credit score if the ratio increases too much.

Risking pledged assets: A UCC lien puts your business’ assets at risk if you default on your loan. A UCC blanket lien allows the lender to sue for all company assets.

How to Check for or Remove UCC Liens

You can go to the state website of the appropriate Secretary of State to find out how to check for UCC Liens. The roster of secretaries is listed here. You can also use a commercial UCC search engine such as the one offered by CSC Global.

A UCC lien can only be removed if the loan has been repaid. Rules vary by state, but generally, one of these actions is necessary:

Lender files a UCC-3 Financial Statement Amendment: The borrower can request the lender to file a UCC-3. Lenders typically don’t file these unless requested. Borrowers should get confirmation from the lender that the UCC-3 was filed.

Borrower swears an Oath of Full Payment: Borrowers can visit their Secretary of State and swear that the loan has been repaid. The state won’t verify your oath, but you may face fines or jail time if you lie.

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