The Gatekeeper: How Does the UCC Affect Your Ability to Borrow?

/ / Published in Creative Capital Associates, Gary Honig
As a government contractor, if your company is considering making a large purchase on credit or applying for any type of commercial loan, you will have to sign a UCC-1 Financing Statement when going to closing on the financing. 

The U.C.C. or Uniform Commercial Code was developed as a way to promote uniformity among various state jurisdictions to govern commercial transactions. Each state has adopted its own guidelines, although new federal guidelines have been adopted to standardize the process.

A UCC-1 Financing Statement is a form that is filed with your State Office of Assessments and Taxation. It is a legal document filed by a lender, agreed to by a borrower, which specifically lists property the borrower has assigned to the lender as collateral against the debt. It shows the lender as a secured party of record, and assists in determining who has first rights to your assets. This protects another lender from lending on the same collateral, and in a bankruptcy proceeding, the secured party will receive full re-payment, while general creditors will get what is left over.

Surprisingly, few borrowers understand the ramifications of signing a UCC Financing Statement. Once a company has signed away all its collateral in a “blanket” security statement, the options on future use of any part of the collateral are limited: the secured party would have to voluntarily release parts of the secured collateral, or the debt must be paid in full. Generally speaking, there are four types of assets that are available as collateral for borrowing: a.) the accounts receivables; b.) the inventory; c.) the equipment; and d.) everything else of any value. But what owners do not realize is that the UCC-1 is a negotiable instrument. 

For example, if you are getting a small credit line, but have an established large A/R balance, you can use all or part of your receivables, leaving your inventory and equipment available for future use as collateral. Just like any other part of the negotiating process, there is give and take on the part of the lender and the borrower depending on how badly one or the other wants the business. Because a lender has filed a UCC-1 on your business, it does not necessarily mean another lender would be unwilling to loan you additional funds. Companies regularly have multiple UCC-1 filings on a different specific piece of equipment or vehicle.

Hints for managing your company’s UCC-1 statements:

  • Contact your State Department of Assessments and Taxation to order an up-to-date search of your company records and get copies of any current UCC-1 statements. Remember this is public information, and a prospective lender will also do a search.
  • If you paid off a debt, contact the original lender and get them to sign a UCC-3 termination, and file it with the same State Assessment office.
  • When negotiating for a loan, don’t stop with the interest rate. Consider your future needs and how the UCC-1 will affect your plans.
  • After signing a UCC-1, make a photocopy for your records because only the lender will receive an official copy of the filing.
  • When talking to a lender, let them know right away about your UCC status. This will win you points for being knowledgeable and up front.

In all aspects of dealing with commercial finance, it is the role of the business owner to know how the process works. Knowing exactly what company assets have been pledged as collateral is key and critical in terms of securing outside working capital for growth. 

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