UCC Liens: What Do They Mean For Your Business?
In today’s video, I’m going to explain what a UCC lien is and everything you need
to know about it.
I’m Priyanka Prakash, senior staff writer and small business expert at Fundera.
UCC stands for Uniform Commercial Code.
When you apply for a business loan, chances are high that the lender will place a UCC
lien on one or more of your business assets.
What exactly does that mean, and why should you care?
Let’s dig into the details.
What Is a UCC Lien?
A UCC lien is used by a lender to show that they have certain legal rights to your business’s
property.
A lien can be filed against a specific piece of property or collateral—like a particular
piece of equipment or your inventory—or a lender can file a blanket UCC lien against
all of your business assets.
Whichever the type of lien, here’s the important part.
If for some reason you can’t pay your loan back, the lien gives the lender the right
to seize the assets that are secured and sell them to repay the loan.
While this might sound scary, liens are actually a pretty routine part of getting a business
loan.
It’s just important that you understand how the lien works and how it can affect you
as a business owner.
For more information on business loans, head over to our video where we cover eight different
types of loans.
How to Know If There’s a Lien Against Your Business
If you already have a business loan, you might be wondering how you can know whether a lender
has already filed a lien against your business.
A lien is public record information, and you can find out if there’s a lien against you
(or another business for that matter) by contacting your state’s secretary of state office.
Many states also have an online UCC search database that’s open to the public.
Here’s New York State’s UCC database as an example.
If I type in the word “baked,” I get a full list of all businesses operating in the
state which have “baked” in their name and a UCC filing on their record.
Clicking a business’s name shows more detail about which lender or lenders have a claim
to which assets.
You can even see a copy of the UCC financing statement (called a UCC-1 financing statement)
that the lender filed against the business.
As an alternative, you can also check your business credit report to see if a lien has
been filed against your business.
Types of Loans That Have Liens
Almost all types of business loans require a UCC lien, including:
* Conventional bank loans * SBA loans
* Online business loans * Asset-based financing, such as inventory
loans * Commercial real estate loans
* Invoice financing * … and more
Only some merchant cash advance providers don’t require UCC liens, but merchant cash
advances can be very expensive for small businesses, so be cautious if you’re applying for this
type of financing.
How Do UCC Loans Affect Access to Capital?
Having a UCC lien on your record signals to a lender that you have already borrowed money
and that another lender has legal rights to some or all of your business property.
This means that the new lender might hesitate to lend money to you.
Every lender wants to be paid back, with interest and on time, but the lender with the oldest
UCC lien, called first position in the lending world, gets highest priority to your assets.
For example, assume that three lenders all have filed a UCC lien against a refrigerator
that your restaurant owns.
Lender A filed the lien in 2017, lender B in 2018, and lender C in 2019.
If you default on all three loans, lender A gets first dibs on the refrigerator and
can sell it off to be compensated for their loss.
Lender A is in first position.
Most high-profile lenders prefer to be in first position and won’t extend you a loan
if another lender has already filed a UCC lien against your business assets.
That said, online business lenders are more likely than bank lenders and SBA lenders to
accept a second or third position.
Since having a UCC lien on your record can affect your access to business capital, it’s
important to remove liens as soon as you pay off a loan.
A UCC filing is generally active for five years, after which a lender needs to renew
the filing to retain their rights in your property.
Most lenders just allow the lien to expire on its own.
If you want to have the lien removed before that, you need to file a UCC-3 financing statement.
Some unscrupulous lenders look through public records, searching for businesses with a bunch
of UCC liens filed against them.
They know that these businesses are in need of capital and may send them offers of pre-approval.
If you receive such offers, make sure you clearly have planned how much financing your
business can afford before agreeing to take on an additional business loan.
That’s the story on UCC liens and what they can mean for your small business.
For more information on small business loans or to apply for a business loan with a group
of vetted, reputable lenders, visit fundera.com.
You can also go to youtube.com/funderaloans, and subscribe to our channel for more videos.
Thanks for watching!