Federal law has a large section of interstate commerce laws called the Uniform Commercial Code (UCC) which, among other things, provides for lenders to see what other lenders have secured as collateral for a business loan. Normally this is all collateral other than real estate. There are several forms within the UCC that business owners should understand because they affect their ability to secure future loans.
A UCC-1 Financing Statement is one of the forms that business owners should know about. In the body of your loan documents with a bank, leasing company or other commercial finance company, you authorize them to file a UCC-1 Financing Statement showing their interest in the collateral used to secure a loan.
When a lender is financing real estate, lenders most often use deeds of trust filed in the courthouse where the property is located to secure their interest in real estate. If a lender is making a loan that includes real estate and other company assets of the business they will file both a deed of trust in the local courthouse and a UCC-1 Financing Statement with the Texas Secretary of State’s office.
Sometimes a trade vendor will file a UCC-1 Financing Statement protecting their interest in inventory they may be providing through trade credit. One of the fundamental rules of a UCC-1 filing is that an authorized company representative gives the trade creditor permission to make a filing.
Ten years ago this was accomplished by the borrower actually signing the UCC form that was to be filed. Some lenders still use this “manual” method so there are no hard feelings between their customer and them later when the borrower tries to secure additional debt and can’t because the first filer has rights to the collateral. In order to streamline and expedite the fillings of UCC-1s, the rules were changed to allow lenders to obtain on a loan application or other legal document the right to file a UCC-1.
Since business borrowers rarely see the actual UCC filing any longer, it is important to check to see if any filings have been filed against your business. This check should be accomplished once a year.
In Texas you can search for UCC-1 filings made against your company through a website provided by the Texas Secretary of State’s office. There is a very small fee for conducting this search.
Normally a UCC-1 Financing Statement expires five years from the date and time of filing as indicated on the UCC-1 form. However, if a loan extends beyond that period, a lender normally files a “Continuation Statement” renewing the original UCC-1 filing for another 5 years.
Sometimes a lender will renew their UCC-1 filing if they make a new loan to a business before the five years is up. The new loan causes the clock to start running its 5 years again.
When a lender changes names or ownership it is often normal to see an assignment using a UCC-1 Financing Statement filed showing the lender’s name change. Customarily borrowers are not notified of these new filings. It is common for Small Business Administration (SBA) loans to be sold by the original lender to another lender. Assignment Statements change the secured party name without interrupting their original lien.
Here are several other things business owners should know about UCC filings:
When an original loan is paid off, some lenders don’t automatically terminate their UCC-1 filings. If the paid off loan with your original bank has since been acquired by another bank, or if your bank has been closed by regulators and the assets have been taken over by other bank, getting the new bank (or FDIC) to terminate interest in the collateral can be a long and difficult process.
Be wary about signing loan applications with commercial finance companies. While it is not likely you will ever experience this with a bank, commercial finance companies occasionally have language in the bottom paragraph of their loan application authorizing them to file a UCC-1 against your collateral. It is always up to you, the business borrower, to read anything you sign.
The rationale used by commercial finance companies is that they will incur due diligence fees when evaluating your loan application. Many businesses are surprised when they find out that a finance company they never did business with has a UCC-1 filing against their business. In order to get them to terminate their filing, you will often have to pay them whatever they believe their due diligence costs were when you signed their loan application. I have seen this “extortion fee” as low as $250 and as high as $2,700. Sometimes you may be successful negotiating this fee to terminate your lien.
Priority of UCC-1 Financing Statements is determined by their date/time stamp recorded at the Texas Secretary of State’s office. Some lenders (especially where titled equipment is involved) only file UCC-1s listing the specific equipment or vehicles being financed. Other UCC-1 Financing Statements cover all collateral. These are called “blanket” assignments. When you have multiple UCC-1s filed against your company, they only conflict when they name the same category of collateral. In that case, the lender who filed their UCC-1 first is in the first position and any others with the same collateral are in second or third position. When two lenders that have UCC-1 filings against the same collateral work together, they often have a subordination agreement or inter-creditor agreement between them that specifies how they will “split up” or give up a particular class of collateral so they can both continue to work with you.
Most importantly, since the cost of searching the Texas Secretary of State’s UCC database is only a few dollars, every business owner should check for UCC filings periodically. There is nothing more frustrating than not being able to secure a loan for your business because you find that a UCC-1 Financing Statement is in place that slows down or prevents you from obtaining business credit.
If you're considering applying for a commercial loan, read more about them here or take a look at our Commercial Borrowing Checklist to help you prepare.