UCC-1 and Business Loans
Many businesses purchase furniture, inventory, equipment, and
other personal property assets by using business loans or leasing. Because these items are mobile, unlike real estate that isn’t going anywhere, it is considered there is additional risk for the
lender. In order for the lender to be willing to assume the risk of the transaction the lender will place a lien on the asset.
During the business loan process a Security Agreement is signed, the lender has funded the deal, and the borrower has received the asset. The Security Agreement is the contract that details the various aspects of the transaction, payments, remedies for default, etc.
Having the signed Security Agreement in hand is not enough protection for the lender. To help secure the business loan a UCC-1 document, also known as a Financing Statement, is filed with either the Secretary of the State, or the County Clerk’s office where the borrower’s business is located.
UCC-1 stands for Form One of the Uniform Commercial Code. There are various UCC Forms/Articles.
The Security Agreement and the UCC-1 Financing Statement are two different things. The Financing Statement is the evidence shown to the world that a Security Agreement has been signed. It Lists the assets securing the loan, and state’s both the lender’s and borrower’s name and address.
The process of filing the Financing Statement is called “perfecting” and helps secure the business loan by placing public notice the borrower cannot sell or dispose of the asset until the debt is paid, and bestows to the business loan provider the right to recover the asset in the event of default. Perfection will also help protect the lender in regards to additional parties who are dealing with the same borrower. The perfection informs anybody searching records, that a lender already has a secured interest in that asset. However, if additional parties want to use the same asset as collateral, the Financing Statement with the earliest date has the senior position.
1. Only assets listed in the Financing Statement are protected by the filing.
2. It is not required to have the borrower's signature on the Financing Statement, so be aware of small print on Lender Applications that allow a "potential" lender to place a lien on the assets even before the borrower has made the final decision to use that lender.
3. The Financing Statement can be assigned or sold, so know the lien against your assets could end up being held by a company you have never heard of.
4. It is the borrower’s responsibility to ask the lender to terminate its UCC-1 filing when the loan is paid off. Understanding documents can be lost or misplaced, the loan could have been sold to another lender, etc., the borrower should be diligent about having the lien removed.
Helpful links regarding UCC:
SBA Security Agreement:
Free Uniform Commercial Code Forms:
State Codes and Resources:
UCC - Article 1
UCC - Article 2 - regarding personal property.
UCC - Article 9 - regarding real estate.
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