If you took out a merchant cash advance (MCA) or other form of business financing, you might have a UCC lien on your business credit reports. UCC liens are common. However, they can present some challenges for business owners, especially when it comes to borrowing money in the future. A UCC lien can also cause issues for your business if you default on your debt. In some cases, the information may be incorrect. This is why you might be wondering whether you need a UCC attorney.
Here’s what you need to know about UCC law and whether an attorney is needed.
What Is a UCC Lien?
The Uniform Commercial Code (UCC) is a set of rules for all commercial transactions in the U.S. It’s not a law but guidelines that individual states are expected to follow. Today, all 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands have implemented some version of the UCC rules. There’s little variation between states.
A UCC lien filing (sometimes called a UCC-1) is a financing statement that creditors sometimes file with the Secretary of State when a borrower takes out a business loan or leases equipment. This filing explains the lender’s lien was against the business’s assets. The creditor can take possession of those assets if the business doesn’t fulfill its debt obligation according to the terms.
A creditor might file a UCC lien against a specific asset in certain cases. For example, if you borrowed money to buy new inventory, the creditor could place a collateral lien against those goods to secure the loan.
With other types of unsecured debt, such as a merchant cash advance, the creditor may use a blanket UCC lien. This places a lien against all of your company’s assets, including future receivables from business transactions. This tends to be the preferred UCC lien among lenders since they’re secured by multiple assets and are less risky.
Regardless of what type of UCC lien is filed, the creditor can seize the collateral to satisfy your debt if you don’t make your payments.
Types of UCC Filings
The UCC-1 is likely most relevant to your business. However, there are actually several different types of UCC filings. Each one serves a specific purpose in the context of secured transactions.
UCC-1 Financing Statement
This is the most common type of UCC filing, establishing a secured party’s interest in the collateral a debtor offers. It’s used to publicly announce the creditor’s right to potential claims on the debtor’s assets in case of default. A UCC-1 can cover various collateral types, from tangible assets like machinery, real estate, and inventory to intangible assets like accounts receivable, bank deposits, and intellectual property.
UCC-3 Financing Statement Amendment
This filing is used to amend a previously filed UCC-1 Financing Statement. It can be used to continue (extend the effectiveness of the filing beyond its initial expiration), assign (transfer the secured party’s rights to another), terminate (end the secured party’s interest in the collateral), or make changes to the information provided in the original UCC-1 (like updating debtor information or collateral description).
UCC-2 Filing (now largely obsolete)
Historically, this was used for filing a financing statement in certain jurisdictions but has been mostly replaced by the UCC-1 form.
UCC-4 Notice of Bulk Transfer (also largely obsolete)
This was used to notify creditors of a bulk sale or transfer of assets not in the ordinary course of business. The aim was to protect creditors from secret sales that could defraud them. However, this form is not really relevant today, thanks to changes in commercial practices and legislation.
UCC-5 Information Statement
This may be filed by a debtor or a secondary secured party to indicate that a UCC-1 Financing Statement has been wrongly filed or amended. It essentially serves as a form of protest, but it doesn’t necessarily alter the legal effectiveness of the financing statement.
UCC-11 Search Request
While not a filing, a UCC-11 is a request for information on UCC filings against a particular debtor. Lenders use it to search for existing liens on a debtor’s assets before extending credit.
How a UCC Lien Impacts Your Business
A UCC lien is fairly standard practice and doesn’t indicate you did anything wrong. However, it can present some challenges for your business.
Business credit could be affected. A UCC lien shows up on your credit report for five years, including its status and any collections or disputes. Having a UCC lien on your credit report doesn’t hurt your business credit score. However, if you default on your debt payments, your score could be impacted.
Difficulty borrowing more money: Lenders and creditors can also see any active liens on your credit report. Multiple UCC liens can be filed with one business, but the creditor that filed first has priority to its assets. Since most small businesses don’t have a lot of assets to offer as collateral, most lenders won’t provide additional financing to a business that already has a UCC lien against it.
Risk of losing your assets: When you borrow money, the expectation is that you will be able to repay it. Of course, there’s always a chance that things could go wrong. If you encounter financial difficulty and cannot make your loan payments, you could lose the assets under the lien.
What Happens if You Default on an MCA?
Merchant cash advances are an increasingly popular form of business financing. They are an advance on future receivables; you get cash upfront, and the MCA provider withdraws a percentage of your sales daily or weekly (plus fees) until the advance is paid off.
However, MCAs can be tricky. They’re expensive and eat into your daily cash flow, making it tough to keep up with payments and all your other obligations.
With MCAs, it’s common for the provider to file a blanket UCC lien. So, if you default, your business assets — including future revenue — can be at risk. Plus, the creditor may contact your clients, vendors, etc., to let them know you’ve defaulted and that any payments should go directly to the creditor (instead of your business). This can be an embarrassing situation and may harm your reputation within your industry.
How to Get Rid of a UCC Lien
There are two ways to get a UCC lien removed. First, you can pay off the debt. Once the outstanding balance is paid in full, the lender must file an amendment with the Secretary of State and release the collateral within one month.
You can also wait for the lien to expire. Since UCC filings usually expire after five years, many lenders don’t bother to terminate them and wait for them to lapse. However, if you already paid off your debt and the lender hasn’t removed the lien, you can submit a formal request to have them do so. They will have 20 days to file a termination statement or send you one to file. If the lender still hasn’t taken action after 20 days, you can file a UCC-3 form to request termination.
When to Hire a UCC Attorney
There are several situations when it might make sense to hire a UCC attorney:
- Complex legal issues. If you’re unsure about the legal implications of the UCC-1 filing, consulting with an attorney can provide clarity and guidance.
- Disputing the filing. If you believe the filing is inaccurate or fraudulent, an attorney can help you contest it. They can advise on the best course of action, whether it’s negotiating with the creditor or pursuing legal recourse.
- Negotiating with creditors. An attorney can represent you in negotiations with the creditor to modify the terms of the debt, seek a settlement, or arrange for the release of the lien once the debt is repaid.
- Protecting your business. If the UCC-1 filing has the potential to impact your business operations, creditworthiness, or future financing opportunities, getting legal advice is a good idea.
Benefits of Hiring a UCC Attorney for Your Business
Having a UCC lien in place is fairly standard practice. Still, it can cause headaches for your business. If you took out a merchant cash advance or other expensive form of business financing, a blanket UCC filing on your credit reports could make it tough to secure more affordable financing options in the future.
Plus, it can be a headache if a creditor doesn’t terminate the UCC lien or you experience some other problem with one. You can get assistance from the Secretary of State, but most people don’t want to spend the time dealing with UCC lien issues on their own. That’s why it can be helpful to enlist the help of an attorney when you need to dispute a UCC lien or resolve another issue related to one.
It may also be a good idea to hire an attorney if you’ve defaulted on your debt and the creditor is contacting your customers for payment. An attorney can help you navigate the process and maybe negotiate a settlement to pay less than you owe.
Tayne Law has been helping clients resolve business debt problems for over two decades. If you’re unsure whether you need a qualified debt relief attorney, contact us for a free phone consultation. We can discuss the issues you’re facing and some of the potential solutions you can pursue. There’s no obligation to speak with us about our services. So call our law firm at (866) 890-7337 or fill out our short contact form. All conversations are confidential, and we never share or sell your information.
Frequently Asked Questions
Most states allow you to search for UCC liens online through the Secretary of State’s website, where the business entity is registered. Some states may have a specific database dedicated to UCC searches. Contact the Secretary of State’s office directly if you can’t find the necessary information.
Both are used to secure debts. However, UCC filings are particularly common in commercial transactions involving personal property. Meanwhile, liens can arise from various circumstances, including non-payment of taxes, services, or judgments.
