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What is a UCC Lien Filing?
If your San Diego business is contemplating a small business loan or a business line of credit or some similar form of general financing, then your lender will require some sort of collateral. In a residential housing example, when you take out a loan to buy a house, the house is collateral for the loan, same as with a car loan. If you do not make the payments on the loan, the collateral will be seized and sold to pay the loan.
For businesses, collateralization is often done through UCC liens and UCC lien filings. Your financing and loan documents will state what collateral the lender is expecting your business to provide. Thus, to understand your rights and obligations, it is important to have an experienced business and corporate attorney review the financing papers before you sign them. Here is a quick rundown.
San Diego Corporate Law: What is a UCC Lien and a UCC Lien Filing?
UCC liens and filings are governed by the Uniform Commercial Code (“UCC”) codified in California at Cal. Comm. Code, § 9101 et seq. In general, the UCC created a uniform set of rules and regulations for use by businesses in commercial transactions in the US. With respect to commercial financing, the UCC created a uniform set of rules for liens and notices. These forms have come to be known as “UCC lien statements” or a “UCC-1.” (UCC-3s are used to remove or release a UCC-1.) In general, for a lender to perfect its collateralization, the lender must make public notice of its security interest and specify the collateral. This is done with the UCC-1 statements and such must be filed. In California, UCC statements are filed with the California Secretary of State. See here. The UCC filings are public records and are routinely searched by businesses and lenders.
San Diego Corporate Law: Types of UCC-1 Liens
As noted, lenders use UCC-1 filings to give public notice of any security interest. As with other forms of public notice such as a mortgage, filing establishes a priority among creditors should there be a multiple security claims to the same set of collateral. This does happen.
In general, there are two types of UCC liens – specific UCC liens and blanket UCC liens. A specific UCC lien would be against, for example, a truck or vehicle (not otherwise subject to any other lien). A blanket lien would be against all inventory, for example. Other examples might be:
- Office furniture and equipment
- Account receivables — money owed to you by customers
- Manufacturing equipment
- Real estate
- Intellectual property such as patents or trade secrets
- Royalties or other types of income streams
- And more
It sometimes happens that a UCC lien specific to one form of collateral is filed and then, later, a blanket UCC lien is filed creating an overlap among the creditors. As noted, your financing and loan papers will specify what collateral the lender is seeking. A good corporate lawyer can make sure there is no overlap in the collateralization.
San Diego Corporate Law: UCC-1 Filings are Routine
After your loan is finished or your line of credit is established, your lender will complete and file the UCC-1 statements as a matter of routine, much like how mortgages are filed as a matter of routine after the closing occurs.
San Diego Corporate Law: Consequences of UCC-1 Filings
In general, UCC filings have little impact on the day-to-day operations of your business. However, be aware that all UCC-1 filings appear on your business credit report. Further, as is generally true, too much debt will limit your business’s ability to secure additional financing or credit. Some vendors and suppliers check UCC filings to determine the bases for selling on credit, establishing grace periods, etc. In addition, of course, a UCC filing will prevent your business from using those assets as collateral for any additional financing. Finally, a UCC filing will prevent you from selling or disposing of the assets in bulk without getting a release of the UCC-1 statement. This is part of the due diligence that is undertaken when a business is bought or sold or if companies merge.
Contact San Diego Corporate Law Today
If you want more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard provides a full panoply of legal services for businesses. Mr. Leonard can be reached at (858) 483-9200 or via email.
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