I am having a bit of fun with the title to this article making UCCs sound like some kind of social disease. Many people regard UCC filings as little better. But UCC filings and the Uniform Commercial Code (“UCC”) that supports them are at the very heart of most financing in our economy and, without them, we would be an economic back-water. Lenders would not be nearly as plentiful, willing and aggressive.

UCC filings provide public notice that a lender has a security interest in a borrower’s assets as collateral for their loan. Lenders rely upon this security interest and public notice to legally insure others cannot take collateral that supports their loan. Collateral can be almost any asset from physical equipment and inventory to intangible accounts receivable.

Here are a few facts readers may find valuable about UCC filings.

  • Most bank loans to businesses are supported by UCC filings.
  • No special form is required for a lender to be authorized to file a UCC financing statement, often referred to as a “lien”. If a borrower signs any agreement granting a security interest in their assets to a lender, that lender is authorized to file a UCC financing statement to support that security interest. A revision to the code several years ago eliminated the need for borrowers to sign filing forms.
  • The date order in which liens from different lenders are filed determines the priority of the lender claims. Most lenders and factoring companies today serving small and medium-sized businesses require they be in the “first priority position”.
  • It is illegal for a lender to file UCC liens unless the borrower has expressly agreed they may do so or the borrower has granted a security interest in some or all of their assets to the lender. Filing an unauthorized lien could expose the filer to liability for any damages.
  • Most lending or factoring agreements to small and medium-sized businesses include a grant of security interest in borrower collateral.
  • By law, if a borrower has settled its financial obligations to a secured lender and the borrower requests release of a lien in writing, the lender must authorize release within 10 days.
  • Anyone can release a lien, however, unauthorized release can expose the releasing party to liability for any damages to the secured lender. When releasing, most lenders today just provide the borrower with an authorization to release.
  • Liens are filed with the Secretary of State’s office in the state of company organization.
  • It is easy to know if UCCs are filed against your company assets. Your banker or finance company will be able to tell you and most Secretary of State offices have this information available online for a modest fee.
  • Whenever you leave a financing relationship, it is a good idea to search with the Office of the Secretary of State in your business’ state of organization and make sure all liens from prior lenders have been released.