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The Universal Commercial Code exists to protect those involved in business transactions by setting forth legal precedents. In some cases, a business may file a UCC 1 before making a deal with a borrower. What is the definition of a UCC 1 filing, and what does it mean?
A UCC 1 Filing is a statement of financing a creditor might file. They will file this statement to demonstrate to other parties that they have a security interest in your assets, whether one or all. It lets the borrower know what is used as collateral should they fall behind.
Are you curious to learn more about what a UCC 1 filing is? You’ve come to the right place. It’s critical to understand a UCC 1 filing just in case you or someone you know finds yourself amid this legal precedent.
What Is A UCC 1 Filing?
For lenders, a UCC 1 establishes them as a secure party in a loan transaction. It’s a financing statement where a lender informs interested parties that they have a security interest in one or more assets in their possession. The personal item is held against them as collateral for their loan.
Many commercial transactions require a UCC 1 filing. However, not all do. There are specific reasons to file.
For example, someone who pays in cash does not need a UCC 1 filing. Their debt is paid off, and they are reliable customers.
However, many times, lenders will incur debt when they provide money to another party. If this is the case, it’s a good idea to have a UCC 1 filing to establish collateral and ensure you will get your loan back in good time. Always file for large loans if you are the lender, such as an extended mortgage or selling large equipment.
What Is The Purpose Of A UCC 1 Filing?
The purpose of a UCC 1 filing is to allow a financier to grab security in interest in the borrower’s assets or property. These items are used as collateral in a loan and may go away if the borrower declares bankruptcy or falls behind on their payments. It’s for the defense of the lender.
In a UCC 1, the lender declares their right to seize a particular property or asset if things go wrong in the loan. Many times, businesses are required to have a UCC 1 filing if the loan or repayment schedule is large enough.
No matter the reason, a UCC 1 is helpful to secure collateral for the lender. They are not against you - they are protecting themselves if things go south.
Types of Liens
There are two types of liens filed. One is for specific, single pieces of equipment or other large and expensive items, while the other is a blanket filing to cover multiple assets at once. Both exist with the intent to protect rights and finances during your agreement period.
Let’s go over the two different types of liens available to lenders. If they file a UCC 1, it will be for one of these reasons. It’s helpful to know what to anticipate to better understand what is going on if you find a UCC 1 filing placed in public. Lenders do not file these because they don’t trust you - they want to defend their rights during your agreement.
Single Equipment Filings
Single equipment filings allow the creditor to take interest in specific assets already identified in the filing. If it’s not mentioned in the filing, the creditor will find it is not covered. If you are financing equipment and other large, expensive items, you will typically encounter single equipment filings.
All-asset filings, or blanket filings, are very different from their single equipment counterparts. This version allows the creditor to take interest in all your assets. Sometimes, the filing notes items that are exempt from this filing. Banks offering money or inventory are the ones who decide all-asset filing is more their speed.
Is A UCC Filing Good Or Bad?
It might seem terrifying to receive a UCC filing as a business. To many, receiving the paperwork might make it feel like the bank or other lender doesn’t trust you to repay your money. It might feel like you are on the verge of losing everything if you make a single mistake with repayment. However, none of this is true.
All a UCC filing is is an official notice from the individual or entity lending the money. It informs you that the lender possesses a security interest in a single (or many) asset. Generally, it is not a bad thing for your company to receive this notice.
However, there are cases where a UCC filing can harm your credit score, hurt your chances of obtaining financial assistance in the coming years, and even lose your company's valuable assets. If you have a UCC filing, pay it back or remove it as soon as possible to avoid inherent risks.
Is A UCC-1 The Same As A Lien?
Although a UCC-1 isn’t technically labeled as a lien, it serves as a lien on any secured collateral. It serves as a lien when filing tactics and components are similar to various lien necessities in most residential contracts for mortgages.
A lien is a claim against the assets used to satisfy a debt. A UCC 1 is a lien, and many call it that - a UCC 1 lien.
What Is An Example Of A UCC Filing?
Sometimes, it’s helpful to have an illustration. Let’s dive into a scenario for a UCC filing.
Let’s say you want to open a donut shop in Los Angeles. To open the shop, you must purchase an industrial-sized fryer to make all your products. If you choose equipment financing to get the tool, the lender might file a UCC 1 lien to inform you that if you do not pay your debt for the fryer, they may seize it and other assets.
A UCC filing is serious. It’s a statement to let others know you have a debt to be repaid, and they are entitled to your assets if you fail to complete that task.
What Will A UCC-1 Do To My Business?
Most UCC liens are only around for five years before they disappear. If your loan is still in motion after those five years are up, you and your business must renew the lease. Five years is a long time, especially for a business. What will a UCC-1 do to your company if you have the stamp on your company for that long?
There are three things a UCC 1 lien aims to do, and it completes many of those successfully. Let’s discuss them to help you determine what dangers and restrictions you will face if you are on the other end of a UCC 1 and do nothing to work through it.
Stops More Borrowing
First, a UCC 1 filing stops more borrowing from occurring. Many small businesses are tiny and don’t have much collateral to work with from the start, which means lenders understand how vulnerable they are. They don’t want to fight over the scraps if you don’t have much to offer.
With limitations on additional borrowing, many loan-takers will not be able to remove more money. It helps keep the flow of money going in the right direction and prevents your business from wasting cash and time on things it cannot afford. When you must repay a debt, an additional loan is the last thing you need.
Puts Pledged Assets At Risk
Everyone has critical assets in their business, from the fryer we discussed earlier to a pretty new tractor on the farm. However, a UCC 1 filing will put all your assets at risk. If you default on your loan or file for bankruptcy, the legal system will take what they want. A UCC 1 filed against you puts your items at risk.
If you receive a UCC 1 filing, it’s critical to note what it’s for. Are they asking you for your new motorbike as collateral? Your car? Did they put most of your business assets on their statement? Note what’s at risk and determine if it’s losing it before you make any rash decisions about defaulting on the payments.
Impacts Credit Report From Business
Finally, a UCC 1 filing will harm your credit report for your business. Any credit report you have will display the UCC lien over the past five years, which means it will also display collections, disputes, and status. However, it won’t hurt your credit report right away.
Your credit report is not supposed to go down from a UCC - but it might for a few reasons related to the UCC 1. A loan counts towards and will negatively impact your credit score if you have gone to collection or defaulted on a loan.
With a lien, the UCC will typically increase your credit utilization ratio. The UCC will continue to do this as needed, which could hinder or harm your credit score.
The best way to stay away from this trouble is to be careful about your loan size and remain responsible with your funds. Do not take on more of a loan than you know your business can handle.
It Is Concerning If A Lender Files For A UCC 1?
Although it might seem intimidating, seeing a lender file for a UCC 1 is not a cause for concern. They do not think you are not going to be able to pay back your loans and are not trying to take your assets prematurely. Instead, they are working to ensure their legal rights are set in stone just in case something happens.
Unfortunately, there are many cases where UCC 1s cause confusion for the businesses being filed against, which can negatively impact your credit score. If you see a UCC 1, don’t panic - it is just the lender claiming collateral on their assets in the loan.
How Can I Look For And Remove a UCC?
It’s always a good idea to look for UCC liens before you apply for any loan. You can look for them on your state secretary’s site or by using a UCC search engine. These should reveal if there is anything filed on your assets before you apply for something new.
A public UCC 1 on your loan isn’t bad. It is a public statement revealing the lender’s rights to your assets until you pay what you owe. However, it can make it trickier to get a loan. If you want to remove the UCC 1, there are a few things you might try.
Pay Off Your Loan
First and foremost, pay off your loan entirely. This method is the only definite way your UCC 1 lien will disappear from your name. If you have enough to cover the remaining balance in full, pay it off and get it out of the way. The sooner you repay your loan, the better.
In some states, the financing statement could stay in your name for up to a year. However, if you’ve paid it off in full, the information in the search engine will reflect that and reveal you do not owe any additional funds.
Ask For A UCC-3 Financial Statement Amendment
You might also try asking for a UCC 3 Financial Statement Agreement. You will ask the lender to file a UCC-3 Termination, which most will not file unless requested by you. Always check with the lender to ensure they file the paperwork on time, or your removal process might be stalled.
It’s a good idea to ask for this information once you pay for your final loan installation, as you will have the trust of your lender. Most lenders will not be eager to terminate an active loan since they refresh every five years, so asking at the end is your best bet.
Reference Legal Explanations
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"What Is A UCC 1 Filing?". Legal Explanations. Accessed on February 23, 2024. https://legal-explanations.com/blog/what-is-a-ucc-1-filing/.
"What Is A UCC 1 Filing?". Legal Explanations, https://legal-explanations.com/blog/what-is-a-ucc-1-filing/. Accessed 23 February, 2024
What Is A UCC 1 Filing?. Legal Explanations. Retrieved from https://legal-explanations.com/blog/what-is-a-ucc-1-filing/.