“Mortgage-backed securities, subprime loans, tranches… it’s pretty confusing, right? Does it make you feel bored or stupid? Well, it’s supposed to.”
— Jared Vennett, The Big Short (2015)
If you’ve ever taken out a business loan or leased equipment, you’ve probably encountered a UCC filing. For many small business owners, this might seem like a mysterious or complex part of securing funding, but understanding UCC filings is essential when it comes to managing your business’s finances and future credit opportunities.
What is a UCC Filing?
A UCC filing is a public notice filed by a lender to let others know they have a legal interest in your business’s assets. It’s essentially the lender’s way of saying, “I have a claim on this property if the borrower can’t pay.” This filing is made under the Uniform Commercial Code (UCC), a set of laws governing commercial transactions in the United States.
When you take out a loan that’s secured by your business’s assets, the lender will typically file a UCC-1 Financing Statement with your state’s Secretary of State office. This public document acts as a lien against your business’s assets, protecting the lender’s rights in case you default.
Why Lenders File UCC Liens
Lenders file UCC liens to protect their interests in the assets you’ve used to secure the loan. A UCC filing gives the lender priority over the collateral you’ve pledged, which means they have the first claim to that property if you default.
There are two common types of UCC liens:
• Specific Collateral: The lien is placed on a specific asset or set of assets (e.g., equipment, inventory, or receivables).
• All-Asset Filings: This is a blanket lien that covers all assets of your business, giving the lender priority over your entire business if you default.
UCC Filings by Merchant Cash Advance and Revenue-Based Financing Providers
Many small business owners might not realize that merchant cash advance (MCA) companies and revenue-based financing providers often file UCCs as well. Even though these financing options are typically marketed as more flexible than traditional loans, the lender will often still file a UCC-1 to secure their interests.
In an MCA arrangement, for example, the UCC lien is often placed on your business’s receivables, meaning that the lender has a claim to a portion of your future sales if you fail to meet repayment terms. While the UCC filing doesn’t usually affect day-to-day operations, it can limit your ability to secure other forms of financing in the future.
Companies Filing UCCs Under an Alias or Third Party
In some cases, lenders file UCC liens using third-party services instead of their own names. Two of the most common third-party filing companies are Corporation Service Company (CSC) and CT Corporation. Traditional lenders like banks, credit unions, and equipment financing companies usually file UCCs under their own names. However, merchant cash advance and revenue-based financing companies often use these third-party services to mask their identity.
The reason for this anonymity is that UCC filings are public records. Companies that specialize in “stacking” capital (offering additional high-cost, short-term funding) often target businesses based on existing UCC filings. By hiding their identity, MCA and revenue-based finance companies protect their clients from competitors poaching their borrowers with stacked funding offers behind the more senior UCC lien.
Many Lenders Don’t Terminate UCC Filings—And Why It Matters
One common issue is that online lenders and other alternative financing providers are notorious for not terminating UCC filings even after the loan is fully repaid. This is more than just an oversight; it’s often a deliberate sales tactic designed to make your business less attractive to other lenders who might offer better terms.
When lenders perform a UCC lien search as part of their due diligence, they may see an existing lien and hesitate to offer funding, fearing that their loan would be subordinated to another creditor’s claim. This pushes you to return to the original lender, as they already have the lien in place. If you want the lien removed, you must contact the lender to request a UCC-3 termination statement, and in the process, they may offer you new financing, effectively pulling you back into their lending cycle.
While lenders are required to terminate the UCC filing upon your request, they are not obligated to do so automatically once the loan is paid off. This leaves the responsibility on you to follow up and ensure the termination is filed.
Removing a UCC Filing
After your loan is paid off, it’s crucial to ensure that the UCC lien is terminated to avoid complications in securing future financing. Here’s how to manage the removal of UCC filings:
1. Check for Existing UCC Filings:
You can search for UCC filings on your business by visiting the Secretary of State’s website in the state where your business is registered. If your business operates in a different state, you should check that state’s records as well, as some lenders file UCCs in the state where you conduct business rather than where you’re incorporated. Additionally, you can obtain UCC information through business credit report providers like Dun & Bradstreet or Experian, which often include UCC filings in their reports.
2. Contact the Lender:
If you find an active UCC lien that should have been terminated, contact the lender directly and request that they file a UCC-3 termination statement to remove the lien from public records.
If you can’t determine who filed the UCC based on your records, you can contact the third-party service (such as CSC or CT Corporation) listed on the filing. These third-party services are required to disclose the lender on whose behalf they filed the UCC. Once you have this information, you can reach out to the lender and request the termination.
3. Be Proactive:
Keeping track of UCC filings is crucial. Lenders, especially those offering more favorable terms, often perform UCC lien searches before approving funding. If they see an outstanding UCC filing—even if it’s related to a paid-off loan—they may be reluctant to offer you financing or may only do so with less favorable terms. Staying on top of UCC terminations helps ensure that your business’s credit profile is accurate and up to date.
The Bottom Line
UCC filings are a routine part of securing business financing, particularly with loans involving equipment financing, lines of credit, and invoice factoring. Even merchant cash advance companies and revenue-based finance providers use UCC filings to secure their interests. In some cases, these companies use third-party services to file UCCs, making it harder to identify the lien holder and increasing the risk of your business being targeted for predatory stacked funding.
Additionally, it’s important to be aware that many online lenders don’t terminate UCC filings once loans are repaid. Failing to terminate a UCC lien can hinder your ability to secure better financing in the future. Always take the time to check your public records, request UCC terminations when necessary, and keep your business’s credit profile in good standing.