What is a UCC-1 financing statement?
A UCC-1 financing statement—also sometimes referred to as a ‘UCC-1 filing,’ a ‘UCC lien,’ or simply a ‘UCC-1’—is a form that creditors use to create a lien against a debtor’s property.
But let’s break that down a bit. In layman’s terms, it’s essentially a document that gives your bank, lender, or other financial institution the right to seize some or all of your property if you default on your loan or go bankrupt.
What does it look like?
Here’s what the first page of a UCC-1 financing statement PDF provided by the Texas Secretary of State looks like:
A UCC-1 financing statement contains three important pieces of information:
- Parts 1 and 2 contain the personal and contact information of the borrower
- Part 3 contains the personal and contact information of the secured party—otherwise known as the creditor
- Part 4 describes the collateral covered in the UCC lien
What is a “lien?”
A lien is an agreement between a debtor—a person borrowing money from someone else—and a creditor—the person lending the money. A lien gives the creditor the right to take some or all of the debtor’s property if the debtor isn’t able to repay their loan.
When a lender wants collateral (protection against default) for a loan they’re giving you, they must complete a UCC-1 financing statement and attach it to the loan contract you both end up signing.
The difference between specific collateral liens and blanket liens
UCC liens come in two varieties: specific collateral and blanket.
Specific collateral liens
These agreements put a lien on one or more specific assets you own. These are common for situations where you’ve borrowing money to buy a specific piece of real estate, equipment, or a vehicle.
For example: if you borrow money from XYZ Bank to pay for a new houseboat, XYZ Bank will likely file a specific collateral lien against that houseboat and list it as collateral in the loan agreement. That way if you default on the loan, XYZ bank will be able to seize and sell your houseboat in order to recover some of the money they lost in the default.
Watch out for blanket liens—if you sign off on one of these, you’re giving the creditor the right to all of your business’ assets.
That might sound scary at first, but it’s rare that a blanket lien will ever actually cover every single one of your assets. Instead, the creditor will usually list which types of assets they’re interested in including in the blanket lien within the collateral section of the UCC-1 financing statement.
Types of assets that could be included in a UCC blanket lien include:
- Real estate
- Office equipment
- Investment securities
- Accounts receivable and payable
- Letters of credit
- Most other business assets
What is the UCC and why does it exist?
States used to have vastly different rules around commercial sales, leases, and financial agreements. Before UCC-1 filings came along, people could put the same asset up as collateral for as many loans as they wanted, because there was no way for lenders to look up if the asset was already part of a loan agreement.
The Uniform Commercial Code (UCC) is a series of laws that most states have adopted to make sure that lenders and borrowers who do business across state lines have some kind of legal protection.
When a lender files a UCC-1 with the applicable governmental authority—usually their state’s Secretary of State—they’re doing what lawyers call “perfecting” their security interest in the collateral.
A “perfected” UCC lien becomes public record, meaning that other potential lenders can look it up and recognize that lender’s claim on the collateral outlined in the filing.
Because of the UCC and UCC-1 financing statements, it’s easy for potential lenders to look a business up and see if it has any UCC liens filed against it before they agree to a loan of their own.
What happens if I default on a loan?
The answer to this one will depend on which state you’re in.
States usually have pretty strong protections in place for borrowers’ personal assets. For example, creditors in most states aren’t entitled to take personal assets or money from your bank account in order to collect a debt. They usually have to sue you first.
However if you’ve put up your assets as collateral in a UCC-1 filing, those protections go out the window. A creditor with a UCC lien against your assets could immediately come after things like:
- Cash from your bank account
- Your vehicle or other personal property
- Any other assets mentioned in the UCC-1
That being said, most states have rules in place to protect a small portion of your personal assets from creditors, even if you have a UCC lien active. These rules usually protect a small amount of equity in your home, a single personal vehicle, retirement funds, and business equipment.
If you’re worried about what defaulting on a business loan could mean for your business and think you might have to protect yourself against a lien, consult a lawyer with a background in asset protection.
How can I check if I’ve had a UCC-1 filed against me?
Easy: just select your state in the dropdown menu on this National Association of Secretaries of State (NASS) website and navigate to your state’s UCC filing portal.
Is it bad if someone files a UCC lien against my assets?
Not really. UCC liens are a standard part of any business loan that requires collateral. Having one filed against your business’ assets only limits you a bit, since it prevents you from putting those assets up as collateral for another loan.
Remember: as long as an asset has a UCC lien filed against it, you’re not allowed to transfer, sell, or use it as collateral for any other loan.
How do I get rid of a UCC lien?
If everything goes as planned and you successfully pay back your loan, the lender must file a UCC-3 financing statement to terminate the UCC lien. However, it’s not unheard of for careless lenders to forget to file a UCC-3, even after the borrower has repaid the full amount. This can create problems if the borrower goes looking for another loan.
UCC-1 filings are active for five years, regardless of whether you’ve paid back the loan. If your lender forgets or otherwise fails to terminate the lien, other lenders will see it when they look up your business in a UCC-1 database and will be less likely to offer you financing.
Before you apply for your next business loan, double-check with your state’s Secretary of State to make sure you don’t have any active UCC-1s.
If you discover that you do in fact have an outstanding UCC-1 for a loan you’ve already paid off, contact the lender and ask them to file a UCC-3 to remove the lien. If they don’t comply, talk to a lawyer.
Welcome to the world of business loans
Although a UCC-1 financing statement by itself isn’t anything to worry about, borrowing and repaying loans is serious business. Taking out a loan and putting your assets up for collateral can be a nerve-wracking experience, and sometimes the jargon in your loan contract can be dense and overwhelming.
What exactly are you allowed to borrow money for when you take out a business loan? How much should you borrow? What type of loan should you get? And how do you qualify? Check out our guide to small business loans for answers to these questions and more.
If you’ve already taken out a business loan, we’ve also got resources for you, too. Check out our guide to paying off business debt if you’re on the hunt for debt-reduction strategies, if you want to learn about restructuring your debt, or if you’re simply looking for some ideas about how to slim down your budget.