Each lender and state has its lending criteria, but when it comes to borrowing and lending money – business loan – they have to follow some rules for the sake of harmony. UCC (Uniform Commercial Code) in 1952 published their first set of laws so that sales and transactions around the US can go with the flow. Technically, UCC fillings or liens are a legal declaration from the lender to notify the interest in the collateral offered by the borrower. If you are applying for a business loan and offering the collateral to your lender to get a fair deal, keep reading!
What is UCC Filing?
The creditor fills out a UCC-1 financing statement, it is a legal form to give official notice to the borrower that the creditor or the lender has an interest in the personal assets shared with the lender. In addition to this, another term is “lien”: the lender has the right to secure the property offered by the lender until the borrower has paid its debt. Usually, lender files UCC lien against businesses or individuals. In case of any mishap, the lender who files first has access to the collateral.
A borrower does not get much from the UCC Filing as compared to the lender, it is for the convenience of the lender. This also allows the lender to protect the interest as the borrower still has the liberty to seize the asset until the borrower clears the outstanding debt. As it is a legal notice, so other lending companies also have access to your business loan information. If you are already in the debt of a lending company and they have shown interest in your collateral, you can’t offer the same collateral to a second lender.
To simplify the concept, let us take an everyday example: when you are committed to someone, you change the relationship status on Facebook from single to taken – if you wish to. So that people know you are committed level. Same is the case with the UCC Filings; the only difference is it talks about your lending history and relationship. Consider, adding a business loan to your UCC Filing, lender’s way of tying the knot.
Let us explore the UCC Lien Filing with a hypothetical example so that all the confusion is out of the way. You run a construction business, and you apply for an equipment financing to get a new loader. Your potential lender will file a UCC stating that the borrower does not pay the price of the loader. In case you fail to make the payment on time, the lender will take control over the loader and will sell the asset to compensate for the loss. Until you have cleared all the pending debt, the loader will remain as the collateral.
In addition to this, let us say you need the extra cash flow, and you apply for a business loan. You can’t put the same loader as collateral this time. If you are applying from New Jersey, the lenders can search the UCC files and see the particular equipment is under the consideration of a lender already.
Another scenario, a particular Bank X files a UCC lien on equipment and another Bank Y files a lien on the same equipment, as Bank X is the first one to file the claim, they have the control over the collateral.
What assets are eligible for the UCC lien?
A lender can file the following assets as they are the ones that are eligible for the UCC lien:
- Office Equipment
- Huge machinery
- Real estate and commercial property
- Other valuable asset owned by the borrower.
Now that you know about UCC Filings, lien and eligible assets, let us explore the two major types of UCC Lien.
Types of UCC Liens
Technically, when a borrower owes money to the lender and the lender wants a claim on the assets. There are two main types of the UCC lien:
- Specific Collateral Lien
Specific Collateral Lien is when a lender has filed a UCC against one or more assets of the borrower but not in all of the business assets. Specific collateral liens are most common in the equipment and invoice financing.
- Blanket Lien
Blanket Lien are common for the business loans guaranteed by Small Business Administration and Alternative Lenders. These lenders use blanket lien to take total control over your small businesses that don’t have any concrete assets to offer as the collateral.
When compared, the latter’s underwriting process is more flexible and relaxed.
Blanket Lien is applicable for short-term business loans, SBA loans, merchant cash advance commercial real estate loan, inventory and invoice financing. Specific collateral is only applicable to Equipment Financing.
How does a lender workaround UCC Filings?
When a lender approves a secured business loan, the lender files a financing statement with the secretary of the state of your hometown. After giving the following information, you can file a UCC financial statement:
- Name of the borrower along with the address.
- Name of the lender along with the address.
- A clear description of the asset presented as collateral.
As all of this information is public knowledge so the lender has access to it. The borrower has to update his loan terms after every five years.
How is UCC Filing relevant to my business?
Keep yourself updated with the UCC Filings! When you are applying for a new loan, make sure all the previous liens are taken care of. Often, a deal is on the final moment between the lender and the borrower and somehow UCC liens are still active. Checking all the filings before proceeding, is a must!
Moreover, it is wise to have a look at the UCC Filings to assess the status of your current loans to update your business credit profile. So save yourself from the surprising delay caused by ill-fashioned UCC Filings. Watch out for pending and unresolved debt to avoid the consequences.
Some lender fills the filing statement of the UCC after the lender has made a final deal with the borrower. On the other hand, some lender file when you start the funding process. This allows the lender to cross-check and keeps the borrower from applying for two loans at the same time.
The Bottom Line
Tread your path towards small business loans carefully keeping the UCC Filings in the mind. As we have already mentioned that UCC Filings are public information, so if you are looking for a small business loan, some lenders might try to contact you offering business loans. Know your financial position and business needs so that you can negotiate a better deal with the lender. Refrain from poor business loan terms.
The goal of the Merchant Advisors is to offer the best business loans to the borrower, so if you are getting offers from illegitimate lenders, call us on our toll-free number at (833) 827-4412; our financial advisors will help you every step of the way. For more information on ideal small business loans and policies and terms regarding official forms, follow us on Facebook and Twitter (@Onlinecheck).