What Is a UCC-1 Filing, and Why Do Lenders Use Them?

A UCC-1 is a financing statement that a creditor files to notify other parties that they have a security interest against one or all of your assets. UCC-1s sometimes cause confusion for business owners who need equipment financing, and these filings can affect your business credit score. However, UCC-1s are generally nothing to be afraid of.

This article will explain what UCC-1s are, why lenders use them, and how they affect your business.

Understanding UCC-1s

UCC stands for the Uniform Commercial Code. The UCC is a set of rules designed to ensure that lenders and borrowers receive some fundamental protections. Every state has its own laws regarding commercial sales, leases, and financial agreements. The UCC exists to standardize the applications of these laws, so companies that do business across state lines don’t have to deal with a patchwork of laws and systems. Today, most states have adopted the UCC.

There are various types of UCC filings, but UCC-1 financing statements (often called UCC-1 filings) are the type of UCC filing that business owners most often encounter. Lenders file UCC-1 documents with the secretary of state when they provide a secured loan for a customer. When a lender files a UCC-1 statement, they announce their right to collateral or liens to secure a loan.

This filing process is also called “perfecting” the lender’s security interest in the collateral. This “perfected” interest becomes a part of the public record, so other potential lenders can see it and recognize the lender’s claim on the collateral.

A UCC-1 financing statement contains the following information:

• Borrower/business name and address
• Creditor’s name and contact information
• The collateral covered by the filing

Why Do Lenders Use UCC-1s?

UCC-1s let lenders communicate to other lenders that there is a lien on an asset. Before the UCC came into effect, there was no universal system to register an asset that was used as collateral in a lending transaction. A business could put the same piece of equipment or set of assets up as collateral for multiple loans. If the business defaulted on the loan, it would create a situation where several lenders all had claims to the same assets.

Lenders don’t file UCC-1s because they’re suspicious of you or believe you won’t pay back your loan. A UCC-1 is just a way for a lender to announce and protect their rights over collateral. When another lender sees the UCC-1 filing for an asset or set of assets, they know not to accept those assets as collateral for another loan (in most cases).

Single Equipment Filings vs. All-Asset Filings

There are two types of UCC-1 filings: liens against specific collateral, such as a piece of equipment, and blanket liens that cover all assets.

• Single equipment filings give the creditor an interest in specific assets that are identified in the filing. Anything not mentioned in the filing is not covered. This is the type of UCC-1 filing you’ll usually encounter in an equipment financing
• All-asset filing: An all-asset filing gives the creditor a security interest that extends to all your assets. In some cases, the filing will identify specific assets that are exempt from the lien. Banks and others who provide inventory and accounts receivable financing tend to prefer all-asset filings, since they reduce the lender’s risk.

What is Purchase Money Security Interest?

Many companies have an all-asset filing on their business because of a line of credit or a bank loan they have. If you have an all-asset filing, you may wonder if it’s still possible to finance a newly acquired piece of equipment.  The answer is yes.

If a business buys a new or used piece of equipment, they may choose to finance that item with someone other than the financing partner who has the all-asset UCC filing. The new finance company will perfect their lien with a UCC-1 and will get in front of the older all-asset UCC using a purchase money security interest on that particular piece of equipment only.

How Will a UCC-1 Affect My Business?

A UCC-1 filing can have a few effects on your business:

• Prevents you from using the same asset as collateral in multiple lending transactions: Putting up the same collateral for multiple loans, also known as “debt stacking,” generally isn’t a practice a healthy business should engage. However, if you had any plans to try to use the same asset to secure multiple loans, a UCC-1 will usually prevent this.
• Allows the lienholder to take possession of the assets if you default: If you default on your loan, the lender can enforce the lien by seizing the assets described in the UCC-1. Hopefully, the risk to your assets should not come as a surprise because your lender adequately explained the financing transaction. As long as you make the payments on your loan and avoid default, your assets will remain perfectly safe.
• Shows up on your business credit report: Your credit report will reveal any UCC liens filed in the past five years. Typically, UCC liens won’t hurt your credit score unless you default on the loan. However, the loan you received will increase your credit utilization ratio, which can eventually damage your credit score if that ratio gets too high.

Should I Worry if a Lender Files a UCC-1?

In general, UCC-1 filings are a normal part of the financing process and are nothing to worry about. Once you successfully pay back your loan, your lender should either file a UCC-3 financing statement, terminating the earlier UCC-1 they filed, or let the UCC-1 expire.

Most of the time, lenders can simply allow the UCC-1 to expire, and it won’t cause any issues. However, in certain circumstances, it might be important to remove the UCC-1 before it naturally expires. If you find that you need to get your UCC-1 removed, you’ll need to contact the lender and ask them to file the UCC-3 Termination Statement.

At Team Financial Group, we can release a UCC-1 after financing is repaid if you need us to do so, and we’re always happy to review and answer any questions you might have.

Partner With Team Financial Group and Get Fast, Flexible Financing Today

At Team Financial Group, we work with clients to identify and customize financing solutions that meet their unique needs. Our commercial equipment financing options can improve your business’ cash flow and overall financial health. To get fast, flexible financing today, fill out our simple online application and let us do the rest.

The content provided here is for informational purposes only. For financial advice, please contact our commercial financing experts.