As a small-business owner, obtaining capital to build your business is a top priority. But when you get a loan,…
As a small-business owner, obtaining capital to build your business is a top priority. But when you get a loan, you may notice something new on your credit reports in addition to the credit account: a UCC filing.
When commercial lenders offer financing to small businesses, they often require collateral to secure the loan amount. To make things official, they’ll add what’s called a UCC filing — the abbreviation stands for Uniform Commercial Code — to your business credit reports.
A UCC filing won’t necessarily impact your business credit, but it may affect your ability to obtain more financing in the future. Here’s what you need to know about a UCC filing and your business.
[Read: Best Small Business Loans.]
What Is a UCC Filing?
A UCC filing, the unofficial name for a UCC-1 statement, is a notice that commercial lenders can add to a business credit report, notifying other lenders that the business has used certain assets to secure a small-business loan.
“UCC filings are extremely common in business, so you shouldn’t worry too much if you spot one on your credit report,” says Leslie Tayne, a debt attorney and founder of Tayne Law Group in New York.
Creditors will file these liens with the local secretary of state office. Essentially, it prevents you from using the same assets to secure multiple loans, which would create problems for your creditors if you default.
The Uniform Commercial Code is a set of rules that states use to align their laws regarding commercial transactions. There are two types of UCC filings that creditors can file:
— Specific collateral lien. With this type of lien, the creditor is only laying claim to a specific asset. For example, if you get an equipment loan to purchase a commercial oven for your pizza business, the UCC filing may only list the oven as collateral.
— Blanket lien. This type of lien is also called an all-asset lien and gives the lender the right to seize a wider range of assets in the event that you default on your loan payments. “Blanket liens don’t just include cash — they can also include land, equipment, property, inventory and more,” says Marguerita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth of Louisville, Kentucky.
In most cases, UCC filings are good for five years, after which the creditor must renew its statement if the loan is still in repayment. “If applicable, your creditor will file a statement with your state that details your financial obligation and the lien placed on your business,” Tayne says.
How Does a UCC Filing Affect My Credit?
A UCC filing won’t impact your business credit scores directly because it doesn’t indicate anything about your ability to repay your debts.
However, it can affect your ability to get credit again in the future. In addition to preventing you from using the same assets to secure multiple loans, a UCC filing also shows potential lenders how leveraged your business is.
If you’ve used a large chunk of your company’s assets to secure financing, it could be a sign that you may have a difficult time taking on and paying back an additional loan.
Unfortunately, this can affect you even if you’ve already paid off the loan. While lenders generally remove UCC filings after full repayment, that isn’t always the case. It might take five years for the loan to drop off your credit report if you don’t request its removal. In the interim, you may try to use an asset to secure a new loan, only to find that it’s still claimed by a past lender.
Finally, a UCC filing can impact your business in the event that you miss payments or default on your debt. Because it’s a legal notice filed with the secretary of state, the lender has a legal right to seize the listed assets to satisfy the unpaid balance.
After you take out a secured business loan, Tayne recommends that you review the UCC-1 statement for accuracy. “If any information is incorrect, contact your creditor or your state’s secretary of state office to get the filing amended,” she says.
How to Remove a UCC Filing
As a small-business owner, it’s crucial that you review your business credit reports regularly. If you notice that a UCC filing remains on your reports even after you’ve paid off the underlying debt, there are a couple of actions you can take:
— Contact the lender. Your first option is to contact your past creditor and ask it to remove the UCC-1 statement by filing a UCC-3 statement with the local secretary of state office. “Upon receipt of your request, the lender has 20 days to file a termination statement for the UCC filing in question,” says Cheng.
— Contact the secretary of state office. Search online for the contact information of the secretary of state office for your state or the state in which the filing was made and ask that it remove the notice from your credit reports. You’ll need to swear under oath that you satisfied the debt, and you may also need to provide evidence that the loan has been paid in full.
If you have a UCC filing on a loan that’s still outstanding, you can generally get rid of it by paying off the loan or refinancing it with a new loan. Just keep in mind that your refinance lender may place its own lien on your assets unless it’s an unsecured loan.
[Read: Best Unsecured Business Loans.]
Can You Avoid a UCC Lien?
It’s possible to avoid a UCC filing by taking out an unsecured business loan rather than a secured one. For example, many online and alternative lenders offer unsecured loans, and you can get an SBA 7(a) loan of up to $25,000 without collateral.
Even with some unsecured financing options, though, lenders may still file a UCC-1 statement with a blanket lien. This is common with merchant cash advances, which aren’t technically loans but commercial transactions.
If you’re planning to buy some equipment, you may consider a lease instead of a loan, which won’t require a lien.
If you’re worried about how a UCC filing may affect your business, consider speaking with lenders before you apply and ask about their policies.
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What Is a UCC Filing and How Does It Affect My Credit? originally appeared on usnews.com