As a businessperson, your specialty is building and running a business, or developing a unique product or service and refining it so that it meets the needs of your customers and stands apart in the marketplace. However, there may be times when your customers need to finance their purchase from you or want to enter into a lease agreement with you. Now you’ve also become a lender, something that may not be familiar to you.
As a result, you may have questions regarding risk mitigation and asset protection, two important things you may have not had to consider before. Here are a few of the more common questions you’re likely to come across.
What does UCC stand for?
UCC stands for Uniform Commercial Code. The UCC is a set of laws concerning commercial transactions, such as the sale of goods. It also covers secured transactions, where a lender gains the right to foreclose on a borrower’s collateral should the borrower default on the loan. This is also called a security interest. Finally, the UCC governs negotiable instruments. Negotiable instruments are a specialized type of document guaranteeing payment by a set date or on-demand. A check or a banknote are good examples of a negotiable instrument.
The UCC aims to provide clarity and consistency across the country. Each state has such laws on commercial transactions, secured transactions, and negotiable interests; however, they have varied historically in strength and breadth. That’s why the UCC is called a uniform code, because it evens out the differences in state laws and gives stability and reliability for companies operating across state lines. In other words, it makes these laws uniform in their application from one jurisdiction to another.
What is a UCC-1 filing?
There are several types of UCCs. The most basic and well known is the UCC-1. Essentially, a UCC-1 can be described as a financing statement. In fact, it is sometimes called a UCC financing statement. A creditor files a UCC-1 to provide notice to interested parties that he or she has a security interest in a debtor’s personal property. This personal property is being used as collateral in some type of secured transaction, usually a loan or a lease.
Who should file a UCC-1 financing statement?
Not every commercial transaction requires a UCC-1 filing. Clearly, if someone pays you cash for your product or service, you need not file a UCC-1 as no debt has been incurred. However, you should file if you engage in a transaction that incurs a debt with some asset as collateral. For example, if you extend a mortgage for a home purchase, provide financing for someone to buy an automobile, lend money as part of a loan, or offer credit for the lease or purchase of equipment of any kind, you should file a UCC-1.
Why should I file a UCC-1 financing statement?
Why should you file a UCC-1 if you meet the criteria listed in the previous answer? In one word, protection. We don’t live in a perfect world. While the overwhelming majority of people you do business with intend to repay you, unforeseen things happen. Your debtor may encounter future financial difficulties that make it difficult or impossible to repay you. Or the debtor may even die before paying off the loan. If that takes place, what happens to your loan or your collateral?
The answer is you may lose all or part of them. A UCC-1 establishes you as a secured party. This means in the event the debtor goes bankrupt, you have a “place in line” so to speak when a court divides that debtor’s assets among creditors. If you are a secured creditor, you stand towards the front of the line (likely behind any government entity, such as the IRS). This means your chances of recovering all or at least some portion of your money or assets are much higher. If you have not filed a UCC-1, then you are considered unsecured, and as such, you are placed in the “back of the line,” behind the secured creditors.
Secured creditors are taken care of first in the division of assets. Unsecured creditors are left to fight for whatever remains if anything. If you are unsecured, your chances of recovering your collateral are quite poor.
Filing a UCC-1 provides you a manner of protection. It also helps you to lessen the risks that come with making a loan, extending credit or entering into a lease agreement.