Are you a business owner looking to take out a new small-business loan? Or perhaps you’ve recently signed an auto loan with your local car dealership?
Both scenarios are entirely common and most likely include a step known as a UCC filing. Thousands of UCCs get filed each year. One state alone can receive over 130,000 filings per year.
If you’re unfamiliar with the term, continue reading. In this article, we’ll explain what a UCC is, what filing a UCC looks like, and the benefits that a UCC brings to individuals and businesses alike.
What Is a UCC?
UCC is short for Uniform Commercial Code. This code is a state-specific set of laws that govern commercial transactions. The code was built in an effort to create uniformity in commercial transactions nationwide.
It is not federally regulated, therefore, states adopt their own legislation as it relates to the base model of the code. What do Uniform Commercial Code laws regulate? Examples include:
- Borrowing money
- Contract setups
- Equipment or vehicle leases
- The sale of goods
The Code is made up of 9 separate articles that address various types of transactions. Let’s take a quick look at them.
The 9 articles of the uniform commercial code address a variety of transactions, however, the most commonly used article is Article 9 which deals with secured transactions. Article 9 is important as it gives a creditor or lender assurance of perfection of the collateral in question.
Other articles cover things such as the sale of goods (Article 2) and bank deposits (Article 4).
UCC Filing Steps
How exactly does a UCC get filed? The financing statement of a UCC is also known as a UCC-1. A lender will typically file a UCC-1 with the secretary of state. This happens at loan origination and gets prepared and signed for by both lender and debtor.
The filing itself works to create a lien against the property in question. The information included on a UCC-1 statement might look like this:
- Debtor’s name and address
- Secured party’s name and address
- Collateral information
This gets filed at the Secretary of State’s business division which can typically be completed online.
UCC-1 filings can cover a multitude of collateral assets. Examples include:
- Trade fixtures
- Office equipment
- Investment securities
- Additional items of value
Take an equipment loan for example. Let’s say you take out a loan to purchase a personal aircraft. Your bank or lender will file a UCC-1 lien in whatever state the aircraft is physically located. The lender can then claim that aircraft as collateral for the loan itself. Your lender can of course seize said collateral upon failure to repay the loan.
What the UCC does is enforce the lender’s security interest. Essentially, the UCC helps the lender legally enforce the lien in question and provide legal notice of their right to take possession if it were to ever go to court.
Numerous benefits accompany a UCC filing. For businesses entering into financial transactions, making sure risk gets mitigated is of utmost importance.
UCC filings can help ensure businesses feel safe and confident in their transactions. Other business assets that UCC filings can be placed against to mitigate risk include:
- Bank deposits
- Sales and leases
- Negotiable instruments
- Warehouse auctions
- Letters of credit
UCCs help put businesses in a position to get paid, as well as give businesses the right to repossess collateral in the event of default. You can seek out and read more on UCC filings to get a more in-depth understanding of what an active UCC filing contains.
Common UCC Terms
It can be helpful to know some of the common language used when it comes to UCC filings. We’ve already gone over a UCC-1 lien which deals with personal property such as equipment or inventory used as collateral.
A UCC blanket lien is another common scenario. If a borrower defaults on their loan, the lender or credit can legally seize all assets equal to the value of the loan in question. Common reasons for when to file a blanket lien include:
- Financing of inventory
- Invoice factoring
- Small-business or short-term business loans
- Loans toward commercial real estate
Another common term in the UCC filing process is known as a UCC security agreement. Businesses sign security agreements when a debtor signs a new loan or lease agreement. The agreement itself is a document that lays out the fact that the business is entering into a contract. Thus, a lien will be filed concerning the outlined goods or assets.
Risk management is of utmost importance, and the more you know certain rules and regulations, the better positioned you will be to protect your assets. Knowing how a UCC filing affects your business can be immensely helpful.
A common item worth noting is that UCC filings are public records, which means they will show up on a credit check. Any business hoping to find lien information on another business can do so by searching the state’s public record database. This is important as potential creditors will know the history of any liens in place related to an individual or business.
Perfecting a UCC
The nature of a UCC can be complex, and the various terms and functions of the Uniform Commerical Code can be overwhelming when you first dive in. Knowing the ins and outs of how the Uniform Commercial Code operates can be helpful when taking care of business interests and overall due diligence.
We hope this UCC filing guide has helped show the importance of UCCs for business purposes. For additional business tips and deep-dives, feel free to browse through our Business & Finance section for more.