What is a UCC enrollment and how does it affect my credit score?

As a small business owner, raising capital to build your business is a top priority. But when you get a loan, you might notice something new on your credit reports in addition to the credit account: a UCC filing.

When commercial lenders offer financing to small businesses, they often require collateral to secure the loan amount. To make things official, they attach what’s called a UCC filing to your business credit reports — which stands for Uniform Commercial Code.

A UCC enrollment does not necessarily affect your business credit, but it may affect your ability to get more financing in the future. Here’s what you need to know about a UCC application and your business.

What is a UCC registration?

A UCC filing, the unofficial name for a UCC-1 statement, is a notice that commercial lenders can add to a business credit report to notify other lenders that the business used certain assets to obtain a small business loan to back up.

“UCC filings are very common in the business world, so don’t worry too much if you spot one on your credit report,” said Leslie Tayne, debt attorney and founder of the Tayne Law Group in New York.

Creditors will file these liens with the local Secretariat of State. Essentially, it prevents you from using the same assets to secure multiple loans, which would cause problems for your creditors if you default.

The Uniform Commercial Code is a set of rules that states use to align their laws related to commercial transactions. There are two types of UCC filings that creditors can file:

  • Specific Lien. With this type of lien, the creditor only claims a specific asset. For example, if you receive an equipment loan to purchase a commercial oven for your pizza business, the UCC filing can only list the oven as collateral.
  • blank head right. Also known as an all-asset lien, this type of lien gives the lender the right to seize a wider range of assets should you default on your loan payments. “Fixed liens don’t just include cash — they can include land, equipment, property, inventory and more,” said Marguerita Cheng, certified financial planner and CEO of Blue Ocean Global Wealth in Louisville, Kentucky.

In most cases, UCC filings are valid for five years, after which the creditor must renew their declaration if the loan is still being repaid. “If applicable, your creditor will file a statement with your state detailing your financial obligations and lien on your business,” says Tayne.

How does a UCC filing affect my credit score?

A UCC registration does not affect yours Business Credit Scores directly because it says nothing about your ability to repay your debt.

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 filing also shows potential lenders how leveraged your business is.

If you’ve used a large chunk of your company’s assets to secure financing, it could be a sign that you may be struggling to borrow and pay back additional funds.

Unfortunately, this can also happen to you if you have already paid off the loan. While lenders generally remove UCC filings after full repayment, this is not always the case. It can take five years for the credit to be removed from your credit report if you don’t request removal. In the meantime, you may try using an asset to secure a new loan, only to find that it’s still being claimed by a previous lender.

Finally, a UCC filing can impact your business should you miss payments or default on your debt. As this is a legal notice filed with the Secretary of State, the lender has a legal right to seize the listed assets to settle the unpaid balance.

After you take out a secured business loan, Tayne recommends that you review the UCC-1 statement for accuracy. “If any information is incorrect, contact your creditor or your state’s secretariat of state to have the filing amended,” she says.

How to remove a UCC filing

As a small business owner, it is critical that you Check your business credit reports regularly. If you find that a UCC filing lingers on in your reports even after you’ve paid off the underlying debt, there are a few things you can do:

  • Contact the lender. Your first option is to contact your previous creditor and ask them to remove the UCC-1 statement by filing a UCC-3 statement with the local State Department. “Upon receipt of your application, the lender has 20 days to file a termination notice for the applicable UCC filing,” Cheng says.
  • Contact the State Secretariat. Find the Secretary of State’s contact information online for your state or the state where the filing was made, and ask that the notice be removed from your credit reports. You must swear under oath that you have paid off the debt and you may also be required to show proof that the loan has been paid in full.

Generally, if you have a UCC filing on an outstanding loan, you can get rid of it by paying off the loan or refinancing it with a new loan. Keep in mind that unless it’s an unsecured loan, your lender may create their own lien on your assets.

Can You Avoid a UCC Lien?

It is possible to avoid a UCC filing by taking out an unsecured business loan instead of a secured one. For example, many online and alternative lenders offer unsecured loans, and you can get an SBA 7(a) loan of up to $25,000 with no collateral.

However, even with some unsecured financing options, lenders can still file a UCC-1 statement with a blanket lien. This is common with merchant cash advances, which are not technically loans but commercial transactions.

If you plan to buy equipment, you can consider leasing instead of a loan that doesn’t require a lien.

If you’re concerned about how UCC filing might affect your business, consider speaking to lenders before applying and asking about their policies.

About Meredith Campagna

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