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 your business, 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. Or in some cases, the information may be incorrect. Which is why you might be wondering whether you need a UCC attorney.
Here’s what you need to know about UCC liens 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 put some version of UCC rules into action. There’s little variation between states.
A UCC lien filing (sometimes referred to as a UCC-1) is a financing statement that creditors sometimes file with the Secretary of State when a borrower takes out a business loan. This filing explains that the lender placed a lien against the business’s assets. If the business doesn’t fulfill its debt obligation according to the terms, the creditor can then take possession of those assets.
In certain cases, a creditor might file a UCC lien against a specific asset. For example, if you borrowed money to buy new inventory, the creditor could place a collateral lien against those goods in order 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. 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.
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, including its status and any collections or disputes, for five years. Simply having a UCC lien on your credit report doesn’t hurt your business credit score. But if you default on your debt payments, your score could be impacted.
Difficulty borrowing more money: Lenders and creditors will also be able to 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 pay it back. Of course, there’s always a chance that things could go wrong. If you encounter financial difficulty and are unable to 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 on a daily or weekly basis (plus fees) until the advance is paid off.
However, MCAs can be tricky. They’re expensive and eat into your daily cash flow. Which can make it tough to keep up with payments along with 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 instead. 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.
Do I Need to Hire a UCC Attorney?
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, if a creditor doesn’t terminate the UCC lien or you experience some other problem with one, it can be a headache to deal with. 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 what you owe.
Tayne Law has been helping clients resolve business debt problems for more than two decades. If you’re not sure 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 give us a call at (866) 890-7337 or fill out our short contact form. All conversations are confidential and we never share or sell your information.