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What Is a Uniform Commercial Code Financing Statement?
Let me explain directly: a UCC-1 financing statement is your formal notice as a secured party asserting a claim against specific personal property of the debtor, all in line with the Uniform Commercial Code.
You need to know that the UCC-1 publicizes the creditor's legal right to seize collateral if the borrower fails to make payments on a loan. It also establishes the creditor's priority over other creditors for that collateral. This is part of the UCC filing system, where the UCC itself is a standardized set of regulations governing business and financial transactions in any U.S. state.
Key Takeaways
Here's what you should remember: a UCC-1 is a public filing that notifies third parties of a creditor's secured interest in a debtor’s personal assets. These forms are used mainly to simplify collection processes. You must file them with agencies in the state where the borrower’s business is incorporated. And there are two types: blanket liens and liens attached to specific collateral.
Understanding a UCC-1
The purpose of a UCC-1 is straightforward— it discloses a creditor's security interest in a debtor's collateral. A security interest is a legal right to a debtor's property established by a contract, such as a loan.
As the creditor, you'll have the right to the property if the debt isn't repaid. Lenders must incorporate completed UCC-1s in a business loan’s contract.
The UCC-1 form details the specific assets that will be seized—and in what order—from debtors if they default. While any asset may serve as collateral, the most commonly used items include real estate properties, motor vehicles, manufacturing equipment, inventory, and investment securities like stock and bond holdings.
Just like with any ordinary lien, you as the lender must file the UCC-1 with the appropriate agency in the state where the debtor company is incorporated.
About the UCC
The UCC was created in 1951 and adopted in 1953, with the goal of easing the complexities of doing business across state lines. It provides a legal and contractual framework for business and has been adopted by all 50 states and the District of Columbia.
Although each state has adopted UCC laws in a slightly different form, the basic tenets remain the same. There are twelve articles governing various types of transactions, including secured transactions, the sale of goods, bank deposits and collections, funds transfers, negotiable instruments, and title documents.
Fast Fact
A quick note for you: a UCC-1 is also called a UCC Lien.
Types of UCC-1
Lenders have the option of filing either of two UCC-1s. Specific collateral liens are commonly used in real estate or equipment transactions—they give lenders first-order secured rights to real estate properties or specific collateral, such as the equipment purchased with the loaned funds.
Blanket liens, also known as all-asset liens, give the lender secured rights to a range of assets, as long as they are detailed in the collateral section of the UCC-1 statement. Lenders tend to prefer this type for the greater protection it offers.
UCC-1 Impact on Credit Reports and Credit Scores
Just as with individuals, most businesses have a credit report and score. A UCC-1 will appear on the credit report, but it won’t necessarily negatively impact a business' credit score unless the business defaults on the underlying loan.
The loan attached to the UCC filing will also increase a business’ credit utilization ratio, which can negatively impact the credit score. Furthermore, the company won’t be able to use the same piece of property as collateral for a different loan if a lien is attached.
Example
Suppose a construction company applies for a business loan to purchase two new hydraulic excavators. Bank XYZ offers the company a loan and files a UCC-1. During the loan period, the construction company loses a large contract and files for bankruptcy.
Without the UCC-1 on record, Bank XYZ would not necessarily have first-order rights to the company's property—it might have to wait until all other lenders are paid. However, because the bank filed a UCC-1 specific collateral lien on the two excavators, it immediately has priority and receives the property or cash stated in the UCC-1 statement.
What Are the Benefits of Filing a UCC-1?
Filing a UCC-1 reduces a creditor's lending risks. It allows them to ensure their legal right to the personal property of a borrower should that borrower default on their loan. In addition, the UCC-1 elevates the lender’s status to that of a secured creditor, ensuring that it will be paid.
What Is a UCC-3?
A UCC-3 is used to change, stop, or continue the original lien established by a UCC-1. Creditors can edit the details of the lien or assign interest to another secured party.
How Can a Business Remove a UCC Filing?
While rules vary by state, businesses can ask the lender to immediately remove the lien upon loan repayment by filing a UCC-3 statement. Another option is to visit the local secretary of state’s office, verify that the business has fulfilled the debt in full, and request to have the UCC-1 removed.
The Bottom Line
In summary, a UCC-1 is a statement filed by creditors that notifies other creditors and the relevant state about their claims on personal assets that a business uses as collateral for a secured transaction. You file UCC-1s with the appropriate secretary of state’s office.
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