It is common to use the assets of the business as collateral to secure payment of a business loan. A Uniform Commercial Code (UCC) lien filing, or UCC filing, is a notice lenders file to inform others of their claim in the assets owned by the borrower in the event of default. Even though the business owner allows the lender to secure the payment of a business loan with the assets of the business, in many cases, the business owner never sees a copy of the filed lien.

When you pay off a business loan, make sure any liens are terminated or have expired. If the Financing Statement has not been terminated, you will need to track down the lender and have it terminated when you sell the assets of your business. A lien against the assets of your business may slow down or prevent you from obtaining additional business credit.

The UCC-1 Financing Statement describes the collateral being secured. It may include some or all of the assets of the business, its vehicles, equipment, inventory, intellectual property and even its accounts receivable.

The lender files a UCC-1 Financing Statement with the Secretary of State of Texas in order to notify others of the lender’s security interest in the business assets. Normally a UCC-1 Financing Statement expires five years from the date of filing. If the loan has not been paid off, the lender may file a continuation, extending the financing statement for an additional five years. If the lender changes names or ownership, an assignment may be filed to show the new lender’s name. When the loan has been paid off, the lender should file a UCC-3 Termination, although the lender may not have done so. When you pay off a loan, follow up with the lender and be sure a UCC-3 Termination is filed, terminating the lender’s security interest in the assets of your business.

The UCC-1 Financing Statement establishes the lender’s priority claim on the assets of the business as of the filing date of the Financing Statement. When there are multiple UCC-1 Financing Statements filed against your company, they only conflict when they name the same category of collateral. In that case, the lender who filed the UCC-1 first is in the first position and any other lenders with the same collateral are in second or third position.

While a UCC lien is a normal part of business and generally does not affect your business’s day-to-day operations, a new lender or equipment vendor may be reluctant to extend business credit to your business if its assets are encumbered with a lien. Also, when you sell your business, in most cases you will be required to transfer the assets of the business free and clear of any outstanding liens.  

Business owners should consult with their legal and tax advisers on business legal matters. For more information, please contact Kathy Tremmel at Tremmel Law, PLLC at (512) 539-0317 or kathy@tremmellaw.com.