Did you know that 99.9% of all businesses in the US are small businesses (less than 500 employees)?
Owning a business can be rewarding in several ways. But, if you’re a business owner, you know there’s a lot that goes on behind the scenes to run a profitable business. Finances are one of the most challenging aspects of business ownership.
This is why you need to know what a UCC filing is. While many business tools are available to help you succeed, you could run into trouble if you don’t know how to read your business credit report.
This article will answer the questions, “What is a UCC filing?” and teach you why it’s essential for your business.
UCC Filing Explained
UCC stands for Uniform Commercial Code. As business activities crossed state lines and the economy grew, the government needed to regulate business transactions. Therefore, in 1892 it created the UCC.
A UCC-1 Financing Statement is a legal notice you receive when a lender has an interest against an asset you used to secure financing. The lender will file it with the secretary of state in the state where the loan originated. If you used tangible collateral, like a home or business equipment, the lender could also file a UCC lien in the state where the collateral is.
UCC filings are a formality in the business world, and they are common for small businesses. This is because most small businesses take out loans. A UCC filing allows the lender to acquire the collateral used for the loan until the borrower repays the debt.
A UCC-1 filing protects the lender if the borrower defaults or goes bankrupt. If this happens, the assets disclosed in the UCC filing will go into foreclosure or be sold.
The Details of a UCC Filing
While lenders can place a UCC filing on almost any business asset, they cannot take personal property. Personal property is often legally exempt from creditors.
Additionally, most states let you keep some company tools and tax-deferred retirement plans. However, it may only be a few thousand dollars worth.
Each state has its own rules regarding UCC filings. When you secure a loan, you should always be aware of the terms and conditions. This also means researching the state’s bankruptcy exemptions should your business go under.
No one expects their business to fail. But, you must prepare yourself if you default or are unable to make loan payments on time.
Furthermore, UCC filings are public records. Some lenders use them to find customers. Be extra aware of loan shark lenders by carefully vetting any lenders you want to borrow money from. Working with loan sharks can ruin your business and leave you stuck in a debt trap for years.
Like individuals, every business has a credit report. Business owners should check their credit reports regularly to ensure no discrepancies between the report and business finances. Unfortunately, mistakes happen, so it’s essential to look for them.
To secure more financing for your company, you need to have a good credit score. Lenders want to know they will be paid back on time. If you have UCC-1 filings on your credit report, lenders may delay or deny future loan requests.
As mentioned before, UCC filings are ordinary for small businesses. Having access to funding more often than not overwhelmingly benefits your business. So why would a UCC filing stop you from getting more funding in the future?
Let’s look at an example.
If you took out a loan from Lender X for $10,000, your payments first go to them. Now you need another $10,000, so you apply with Lender Y. Lender Y will see a UCC filing for $10,000 on your company. They know you still have to pay back that loan.
It doesn’t sound so bad, but it makes the lender wary. If you default or go bankrupt, Lender X will get repaid before Lender Y. Lenders call this second position. There is a chance Lender Y will not recoup the loan costs should anything happen to your business.
It is not to say you won’t get a second loan anywhere, but lenders want to see that you don’t have any outstanding loans before giving you money. Again, it’s for their security.
How to Remove a UCC Filing
So, once you repay a loan, you must make sure the lender removes the lien. As stated, mistakes happen. Sometimes lenders forget to remove a UCC filing. This is why regularly checking your credit report is so important.
If a lender hasn’t removed the lien and you already repaid the loan, don’t hesitate to contact them. They can file a UCC termination statement, known as the UCC-3 termination form.
Let’s say you’re unsure whether there is a UCC filing on your business credit report. Luckily, you can search public records. You don’t have to search through all the documents yourself, but you can outsource the job to a specialized company.
It’s a good idea to have someone help sift through the public records and gather all the information available on your company. This way, you have a clear picture of where your company finances stand.
However, the cost to perform a lien search varies depending on how many searches the company has to do to get the correct information. Therefore, it is best to consult with a few different companies to get an estimate beforehand.
Succeed in Your Business
As you can see, knowing what a UCC filing is and how to tell if a lender has filed one against your business is crucial. Any company that took out a loan in the past will have had a UCC filing in their credit report. Being aware of these filings helps you track your business finances and manage a good credit score.
If you found this article helpful, make sure to check out the rest of the blog.