What is UCC Filing?
UCC Filings stands for Uniform Commercial Code Lien filing. They refer to a legal notice which lenders have to file when a borrower defaults in his/her payment. The warning serves as a claim on the asset of the borrower for the repayment of the loan. The notice can be filed against both individual parties as well as businesses. The type of assets it allows you to claim may also differ situation to situation. The term depends on the rules applicable by the governing commercial transactions.
How Are UCC Filings Used?
A UCC filing is used to get back your money after your borrower defaults on his payments. For a UCC Filing to begin, the borrower must first pledge its assets, as collateral, to the lender for the purpose of a loan. To do so, a security agreement is signed, which gives the lender the power to put claims on specific assets. Once this is done, a lender may use a UCC filing to provide notice to the borrower about the lender’s right to the assets of the borrower.
How Do UCC Filings Work
UCC filings work on a first come first basis. For example, let’s say you have borrowed money from multiple lenders and have pledged your assets as security. In case of default, whoever files their UCC filing first will get the first right to the equipment. This means that once your asset is sold off, the first lender to make a claim will be repaid first, and then the others will be reimbursed depending on the amount that remains.
Types of Assets for UCC filing
Here are the different types of assets which a lender can exercise his/her claim on:
- Inventory of the company
- Office equipment and machinery
- Letter of credit
- Commercial instruments
How Do UCC Filings Affect Business Credit Score?
UCC stays on your credit report and hence negatively impacts your chances of obtaining business financing. This is because it indicates to your lenders that you are not financially sound enough to make payments. No lender wants to go through the hassle of liquidating your asset for getting its payments. So, it may negatively affect your credit score. To improve your score, you must try to avoid UCC filing and work to remove it from your report if they are filed.
The Importance of UCC Filings
UCC filings have changed the business landscape and borrowing practices for the better. Previously businesses were able to get multiple loans by pledging the same equipment without other lenders knowing about it. Now, the public nature of UCC filings means that as a lender you can know which assets of a company are available for collateral, at time of loan application.
Types of UCC filings
UCC filings can be bifurcated into two categories, specific collateral and blanket liens. In the former, a particular asset is pledged as security. The lender can only have a claim on the given asset. In the latter, a lender can make a claim on all the assets of a business.