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.
How to file a UCC-1 financing statement
Where to file a UCC financing statement (UCC-1) depends on the debtor’s location and the collateral used to secure the loan or lease. Your location, if different, is not a factor. In all cases, you should file a UCC-1 with the secretary of state’s office in the state where the debtor is incorporated or organized (if a business), or lives (if an individual). If the collateral is real property (such as a mortgage or equipment), you should also file a UCC-1 with the county recorder’s office in the county where the debtor’s real property is located.
Secretaries of state have websites set up where you can file a UCC-1. They also have instructions on how to use the website as well as the forms you will need to complete. Individual counties in each state may, or may not, have websites where you can file. You may have to file by mail or, in increasingly rare cases, in person. Be sure to check first.
While there is a national UCC-1 form available to download, the jurisdiction you want to file in may require a form specific to that jurisdiction. Use that form instead. Otherwise, you may run into problems later.
Whatever form is used, be sure to read all instructions first and fill out each section completely and accurately. Pay careful attention to ensure you use the debtor’s exact legal name and correct contact information. A debtor company’s organization documents will have this information.
What are the benefits after filing a UCC-1
A state or county UCC section allows you to give public notice that you, as a creditor or secured party, have entered into a security agreement with a debtor, along with a description of the collateral involved. The UCC-1 filing establishes your priority in case of debtor default (places you with other secured creditors at the “front of the line”).
A state’s or county’s UCC section can provide you with the needed forms to make an initial filing, amend or extend a current filing, make assignments if necessary, and check on other filings against a debtor.
How much does it cost to file a UCC financing statement?
With the myriad of jurisdictions across the country, it’s impossible to provide a list of the cost for each one. However, in general, most charge a nominal fee in the range of $10 to $25 per filing. Many states and counties assess a separate filing fee for each debtor on a filing as well. In other words, you may have one filing, but five different debtors listed on the form. Some states and counties may charge a fee for each debtor even if you are only filing one form. Be sure to check prices and fees before filing to avoid any unnecessary or unwanted budget surprises.
How long does a UCC filing last?
A UCC-1 filing is good for five years. After five years, it is considered lapsed and no longer valid. Should your debtor remain in debt to you and encounter financial difficulty or file for bankruptcy, you have no secured interest if your UCC-1 filing has lapsed. In other words, you are now an unsecured creditor and must go to the back of the line when assets are divided. This means you can possibly lose most or all of your assets tied into the loan or lease.
However, you may extend a UCC-1 filing before the end of the five-year period. You have the opportunity to file a continuation statement. You must file this continuation statement within six months before the initial filing’s lapse date or expiration.
How can I manage a UCC portfolio?
As you can see in the Q&A above, UCC-1s are important documents. They ensure your secured interest in a loan or lease, enabling you to stand at the front of the line of creditors should a debtor encounter financial difficulty or file bankruptcy during the life of your agreement. UCC-1s help you to mitigate risk and protect assets (collateral).
However, managing a UCC portfolio is a time-consuming chore. You are, of course, an expert in your business. You may not be an expert in UCC portfolio management or have the time to devote to it with all your other responsibilities.
You may be wondering if you have made a proper and correct (perfected) filing or worried you may forget to file a continuation statement in time as a lapse date approaches.
You can assign this duty to a staff member or hire additional employees to handle these chores for you, but that can come at a price of higher labor costs or lost productivity.
Fortunately, there are third-parties that can provide these services to you, allowing you to stop worrying and focus your time on what you do best: running your business and helping your customers.
Lien Solutions is such a third-party provider of UCC portfolio management services. For nearly 40 years, Lien Solutions has assisted companies with electronic and Web-based UCC portfolio management applications. With our innovative iLienTM solution, we can help you better manage your portfolio and regain lost productivity through workflow optimization, reducing the time and labor spent on this critical chore. We also assist in ensuring your filings are complete and correct (perfected). This means you are able to avoid the misfortunes that come with having your secured interest challenged because of an imperfect (incomplete or incorrect) filing. We can set up a system to alert you when a filing is approaching its expiration date so that you can file a continuation and further protect your assets throughout the life of the loan.