What are UCC-1 Lien Notice Filings and What Do You Do if Your MCA Lender Files One Against You?
Did you just receive a call from one of your vendors telling you that they received a UCC lien from your merchant cash advance lender? Is the lender demanding that your vendor pay them directly instead of paying you? Hopefully we can explain here what is going on and advise you as to what your options are.
When you received your merchant cash advance, your lender prepared and recorded what is referred to as a UCC-1 filing.
What is a UCC Filing?
A UCC filing, also known as a UCC lien or a UCC-1, is a financing statement which lenders can file against your business with your secretary of state. When you take out a secured loan, the lender may file a lien to protect the asset(s) you committed to secure financing. This might be a piece of equipment, a vehicle, property, or even a blanket lien naming all your assets.
A UCC-1 protects a lender’s interests for five years (unless the lender refiles) and may appear on your business credit reports. Please keep in mind that UCC filings are public records. Therefore, even if a UCC lien may not show up on your business credit reports for some reason, it might still come up if you apply for new business financing.
How is a UCC Lien Filed?
A UCC lien is filed when you have received some type of business loan or financing. Depending on the type of funding your business has received, the language and security/collateral on the UCC filing statement will vary.
Many unsecured business loans companies will file a blanket lien on business assets. This loan is still considered unsecured because it cannot penetrate the corporate veil and go after personal assets in the event of default.
That UCC-1 then creates a lien against the business entity and one or more of the debtor’s assets to secure the amount the debtor borrowed.
A UCC-1 Financing Statement requires just a few pieces of information. Each state’s UCC paperwork can and likely will be different, however, the below is an example of what is required based on New York’s Department of State:
- Debtor’s name: This can be either an organization (partnership, corporation, etc.) or individual (including sole proprietorships).
- Debtor’s address
- Information related to the debtor’s organization
- Additional debtors (if any)
- Secured party’s information (the lender securing the loan)
- List of collateral included as part of the agreement: This is what the UCC lien will cover
What Can Lenders Place Liens On?
The purpose of UCC filings is to gain security in something. Lenders can place a UCC lien on a variety of things. The easiest way to understand it is in connection with collateral, a more commonly understood element of the borrowing process.
Most things which can be used as collateral for a loan can have a UCC lien placed on them. This includes:
- Letters of credit
Why a UCC Filing Could Hurt You
UCC liens are not unusual in the world of business financing and, unlike liens on your personal credit, a UCC filing does not indicate that you’ve done anything wrong.
Nonetheless, future lenders might be hesitant to approve applications for additional credit until you satisfy your existing lien(s).
An existing UCC-1 filing may increase your company’s credit risk from a lending perspective. It demonstrates that you may already owe money to another lender and that your assets may be pledged elsewhere.
Methods to Remove a UCC Filing
- Ask the lender to terminate the lien upon payoff.
- Visit your secretary of state’s office.
- Dispute inaccurate information on your business credit reports.
A lender should remove a UCC-1 whenever you negotiate a settlement and/or pay off the subject debt associated with it.
Regrettably, it does not always work that way. You may have negotiated and paid a settlement of the debt or even satisfied the debt in full, however, the lender may not take the necessary steps to remove the lien.
You can check your business credit reports and your secretary of state’s website to search for UCC filings against your company. If you discover an outstanding UCC lien which is still in place after you satisfy a debt, here are some steps you can take to remove the UCC filing.
Ask the Lender to Terminate the Lien Upon Settlement or Payoff
When you pay off a loan or advance or if you settle a loan or an advance, you should immediately submit a request with the lender to file a UCC-3 form with your secretary of state. The UCC-3 will terminate the lien on your company’s assets and remove the UCC-1 filing.
Visit Your Secretary of State’s Office.
If your lender fails to file a UCC-3 form after you satisfy a debt, another option you may consider is making the request yourself. To do so you will generally need to make a trip in person down to your secretary of state’s office. Once there, you will be able to swear under oath that you have satisfied the debt in full and wish to request for the UCC-1 filing to be removed.
Types of UCC liens
There are 2 types of UCC liens:
- Specific collateral lien: This type of lien uses a single asset as collateral. An example would be a piece if equipment utilized in your business.
- Blanket lien: This type of lien “blanket” covers many different assets, all of which can be used to settle a debt in the same way as any other collateral. Most Merchant Cash Advance companies attempt to lien a business debtor’s future receivables by using a blanket UCC lien.
Every state has a way to search for UCC filings done within that state. You can visit your state government’s official website to search their database to find your UCC lien information.
Be Smart About UCC Filings
When you accept finance terms a lender proposes to you, it is important to understand that you are accepting an agreement that may require a UCC lien be placed on one or more of your business assets. A UCC filing is a normal part of the borrowing process and, generally, not something bad or unexpected.
Of course, there are drawbacks to having a UCC filing against your business such as the increased difficulty in obtaining additional funding and possible interference with your vendor or customer relationships in the event that you end up in some sort of dispute with the lender.
If you have a UCC filing that can or should be removed, make sure to take the proper steps to remove that lien so that you are free to obtain future financing, if and when that need may arise.
Specifically regarding Merchant Cash Advance, if your business defaults on your merchant cash advances, your funding companies will, more often than not, send the UCC liens to your customers demanding that they pay the funders directly rather than paying you, because the funders allegedly purchased your future receivables.
This may greatly harm your existing business relationships and if you believe that you may not be able to continue to pay your merchant cash advance debt, you should seriously consider consulting with an experienced attorney before any damage is done.
If a blanket UCC lien has been filed against your company, please read the filing very closely. Ask yourself the following questions:
- Did the merchant cash advance lender accurately claim the correct dollar figure collateral that you owed?
- Did the lender clearly define what collateral has been pledged?
- Is the collateral noted with specificity?
- Does the filing not reflect the arrangement you reached with the Merchant Cash Advance lender?
Business Debt Law Group is available to provide complimentary legal consultations to help you with any of your merchant cash advance or traditional business debt needs. Before you take any action that you could possibly regret, please feel free to schedule a free consultation or give us a call to discuss your questions and concerns.