UCC Filings Explained: What Happens When You Get a Business Loan

When you take out a business loan, you will likely hear about UCC filings. These three letters confuse many business owners, but understanding them is essential for managing your business finances and future borrowing ability.

UCC stands for Uniform Commercial Code. A UCC filing is how a lender publicly claims a security interest in your business assets. Think of it as a "lien" on your business property.

What Is a UCC-1 Filing?

A UCC-1 financing statement is a legal document that a lender files with your state (usually the Secretary of State) to publicly announce their security interest in your business assets.

• Public record: Anyone can search and find UCC filings against your business
• Priority system: First to file has first claim on assets in case of default
• Renewal required: UCC filings expire after 5 years and must be renewed
• State-specific: Filed in your state of incorporation or organization

Why Do Lenders File UCCs?

Lenders file UCC-1 statements to:

• Secure their loan: Establish legal claim to business assets if you default
• Establish priority: First-filed lender has first claim on assets
• Prevent fraud: Public record prevents you from pledging same assets twice
• Enable recovery: Easier to repossess or liquidate assets after default

Types of UCC Liens

UCC filings can cover different scopes of assets:

The Blanket Lien: Most Common and Most Restrictive

Most business loans, especially term loans and lines of credit, include a blanket lien. This gives the lender a security interest in:

• All equipment: Machinery, computers, vehicles, fixtures
• All inventory: Products you sell or materials you use
• All accounts receivable: Money owed to you by customers
• All general intangibles: Intellectual property, contracts, goodwill
• All deposit accounts: Your business bank accounts
• All future assets: Anything you acquire after the loan

How UCC Priority Works

When multiple lenders have UCC filings against your business, priority matters. If you default and assets are liquidated:

• First in time, first in right: The lender who filed first gets paid first
• Senior vs. junior position: Earlier filings are "senior" to later ones
• Subordination agreements: Lenders can agree to change priority order

Example: You have a $200K term loan (UCC filed January 2024) and a $100K line of credit (UCC filed June 2024). If you default and assets sell for $150K:

• First lender (term loan) receives $150K toward their $200K balance
• Second lender (line of credit) receives $0
• You still owe $50K to the first lender and $100K to the second

Impact on Future Borrowing

Existing UCC filings affect your ability to get additional financing:

• Lender searches: New lenders check for existing UCCs before approving loans
• Priority concerns: Lenders may decline if they would be in junior position
• Subordination requests: New lenders may require existing lender to subordinate
• Asset availability: If assets are fully encumbered, less collateral available

How to Search UCC Filings

You can search UCC filings against your business:

• Secretary of State website: Most states have free or low-cost search tools
• Commercial services: Services like LexisNexis, D&B, or Experian Business
• Your attorney: Can conduct comprehensive searches

Search your business legal name exactly as registered. Also search common variations and any DBAs.

UCC Filing Process

Here is what happens when a lender files a UCC:

• 1. Loan approval: You are approved for a business loan
• 2. Security agreement: You sign an agreement granting lender a security interest
• 3. UCC-1 filed: Lender files UCC-1 with the state (usually your state of organization)
• 4. Filing acknowledged: State returns acknowledgment copy to lender
• 5. Public record: Filing is searchable in state database

UCC Termination: Getting Liens Released

When you pay off a loan, the UCC lien should be released:

• Request termination statement: Ask your lender in writing to file UCC-3 termination
• Lender obligation: Lenders must file termination within 20 days of proper request
• Follow up: Verify the termination was filed by searching state records
• Keep documentation: Save your payoff letter and termination acknowledgment

UCC Filing Costs

UCC filing fees vary by state:

These fees are typically passed on to borrowers as part of closing costs.

Common UCC Situations

Here are scenarios you might encounter:

Scenario 1: Equipment Purchase with Existing Blanket Lien

You have a term loan with blanket lien and want equipment financing:

• Equipment lender needs first position on the new equipment
• Term loan lender must agree to carve out the specific equipment
• Term loan lender files UCC-3 amendment excluding that equipment
• Equipment lender files UCC-1 specifically on the new equipment

Scenario 2: Refinancing an Existing Loan

You refinance your term loan with a new lender:

• New lender requires first position
• Old loan is paid off at closing
• Old lender files UCC-3 termination
• New lender files UCC-1 in first position
• All happens simultaneously at closing

Scenario 3: Adding a Line of Credit

You want a line of credit but have existing term loan:

• New lender accepts second position, OR
• Existing lender agrees to subordination, OR
• Line of credit lender takes security interest in specific assets (like AR)

UCC Red Flags

Watch for these warning signs:

• Multiple blanket liens: Indicates potential over-leveraging
• Liens from unknown lenders: Could indicate fraudulent filings
• Tax liens: IRS or state tax liens are serious problems
• Judgment liens: Court judgments converted to liens
• Stale filings: Old liens that should have been terminated

Questions to Ask Before Accepting a UCC Lien

Before signing loan documents:

• Is this a blanket lien or specific collateral?
• Can specific assets be excluded from the lien?
• What is the termination process when the loan is paid?
• How long after payoff will you file the termination?
• Will you provide subordination for future equipment financing?
• Are there any continuing obligations after the loan is paid?