As a small business owner, securing capital to build your business is a top priority. But when you get a loan, you might notice something new on your credit reports besides the credit count: a UCC deposit.
When commercial lenders provide small business financing, they often require collateral to secure the loan amount. To make things official, they’ll add what’s called a UCC filing — the abbreviation stands for Uniform Commercial Code — to your business credit reports.
A UCC filing will not necessarily impact your business credit, but it may affect your ability to obtain more financing in the future. Here’s what you need to know about a UCC filing and your business.
What is a UCC deposit?
A UCC filing, the unofficial name for a UCC-1 statement, is a notice that commercial lenders can add to a business credit report, notifying other lenders that the business has used certain assets to secure a loan. to small businesses.
“UCC filings are extremely common in business, so you shouldn’t worry too much if you spot one on your credit report,” says Leslie Tayne, debt attorney and founder of Tayne Law Group in New York.
Creditors will file these liens with the local Secretary of State’s office. Essentially, this prevents you from using the same assets to secure multiple loans, which would create problems for your creditors in the event of a default.
The Uniform Commercial Code is a set of rules that states use to align their laws regarding commercial transactions. There are two types of UCC filings that creditors can file:
- Specific warranty pledge. With this type of lien, the creditor only claims a specific asset. For example, if you obtain an equipment loan to purchase a commercial oven for your pizzeria, the UCC record may only show the oven as collateral.
- General privilege. This type of lien is also called an all-asset lien and gives the lender the right to seize a wider range of assets in the event that you default on your loan. “General liens don’t just include cash — they can also include land, equipment, property, inventory and more,” says Marguerita Cheng, certified financial planner and CEO of Blue Ocean Global Wealth of Louisville, Ky. .
In most cases, UCC deposits are valid for five years, after which the creditor must renew their declaration if the loan is still in repayment. “If applicable, your creditor will file a statement with your state that details your financial obligation and the lien placed on your business,” Tayne said.
How does a UCC deposit affect my credit?
A UCC filing will not affect your business credit ratings directly because it says nothing about your ability to repay your debts.
However, this may affect your ability to get credit again in the future. In addition to preventing you from using the same assets to secure multiple loans, a UCC record also shows potential lenders how leveraged your business is.
If you’ve used a lot of your business assets to get financing, it could be a sign that you may be having trouble taking out and repaying an additional loan.
Unfortunately, this can affect you even if you have already repaid the loan. Although lenders generally remove UCC deposits after full repayment, this is not always the case. It may take five years for the loan to drop off your credit report if you don’t ask for it to be withdrawn. In the meantime, you may try to use an asset to secure a new loan, only to find it’s still claimed by an old lender.
Finally, a UCC filing can impact your business if you miss payments or default on your debt. Because this is a legal notice filed with the Secretary of State, the lender has the legal right to seize the listed assets to settle the outstanding balance.
After taking out a secured business loan, Tayne recommends that you verify the accuracy of the UCC-1 statement. “If any information is incorrect, contact your creditor or your state’s secretary of state to have the record amended,” she says.
How to delete a UCC repository
As a small business owner, it is essential that you review your company’s credit reports regularly. If you notice that a UCC deposit remains on your reports even after you’ve paid off the underlying debt, there are a few steps you can take:
- Contact the lender. Your first option is to contact your former creditor and ask them to remove the UCC-1 statement by filing a UCC-3 statement with the local Secretary of State. “Upon receipt of your request, the lender has 20 days to file a termination statement for the UCC filing in question,” Cheng explains.
- Contact the State Office Secretariat. Search online for the contact information for the office of the Secretary of State in your state or the state in which the filing was made and ask them to remove the notice from your credit reports. You will need to swear under oath that you have paid the debt and you may also need to provide proof that the loan has been repaid in full.
If you have a UCC record on a loan that has not yet been repaid, you can usually get rid of it by paying off the loan or refinancing it with a new loan. Just keep in mind that your refinance lender may place their own lien on your assets, unless it’s an unsecured loan.
Can you avoid a UCC privilege?
It is possible to avoid a UCC filing by taking out an unsecured business loan rather than a secured loan. For example, many online and alternative lenders offer unsecured loans, and you can get an SBA 7(a) loan for up to $25,000 without collateral.
Even with some unsecured financing options, lenders can still file a UCC-1 statement with a general lien. This is common with merchant cash advances, which are technically not loans but business transactions.
If you are considering purchasing equipment, you may consider leasing rather than a loan, which will not require a lien.
If you’re worried about how a UCC filing may affect your business, consider speaking with lenders before applying and ask about their policies.