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The lien on your business you never knew you had

By Meredith Wood | Small Business

If you have ever applied for any type of business loan, you may be shocked to learn that there could be a lien filed against your business right now.

It may sound unbelievable, but it’s a true. A bank or finance company may have a form filed with your state’s authorities declaring their right to your office, warehouse, property, equipment or other business assets should you ever default on a loan or declare bankruptcy.

Here’s why you may have a lien filed against your business right now, who might have filed that lien, and how to find out if any such liens exist.

What is a UCC Lien?

The Uniform Commercial Code (UCC) is a set of federal regulations put into place to simplify commerce between all U.S. states and territories. Without the UCC, it would be more difficult for lenders and borrowers from different states to do business with one another, due to varying regulations in each state.

If a small business owner ever runs into the UCC, it is probably in the form of a UCC-1 Financing Statement. Lenders file these statements in order to protect their interests should you default on your loan or file bankruptcy.

If you have ever taken out a business loan, then your lender has most likely filed a UCC-1 lien against your business with your state’s Secretary of State’s office or other governing authority. (If you do business in multiple states or are located near a state border, they may even file this lien with multiple states’ governing authorities.)

For example, say you own a commercial building and used the value of that real estate as collateral to secure a loan from Bank XYZ. Bank XYZ, in the course of underwriting your loan, will file form UCC-1 to give public notice that they have an interest in your asset – in this case your commercial building – should you file bankruptcy or default on your loan.

Other lenders may file what is called a “blanket lien.” A financing body like a bank or a commercial financier may file a lien against all of a company’s collateral rather than just one asset.

Why is it Important to Understand UCC Liens?

Having a UCC lien on your property or business can actually slow down any future small business loan processes and potentially hinder your growth.

Take this example:

You operate your business in the state of Texas and you took out a loan with a local bank to fund your company. This bank filed a blanket UCC lien with the Texas Secretary of State’s Office. When you later go to take out another loan with an alternative lender, that lender runs a search and finds that this bank has the blanket lien and thus “first rights” to all of your business’s collateral should you default or declare bankruptcy. While the two lenders may be able to negotiate terms that satisfy both of them in the event of your default, this process could delay the underwriting of your loan and harm your business.

How is a UCC Lien Filed?

Your lender files UCC liens with your state’s authority governing business and commerce. This is generally your state’s Secretary of State’s Office.

Be warned that you may have UCC liens out against your business even if you have never actually taken out loan. Some lenders included a UCC lien against your property or business in the application. This means that they may take out the lien as part of their “due diligence” when deciding whether or not to underwrite your loan – even if they eventually turn you down for financing.

In this event, you may have to negotiate with the lender to remove the lien, even if they did not lend you money. This process can cost hundreds or thousands of dollars, so be very careful when reading the fine print, even in business loan applications.

Be aware that, sometimes, UCC liens remain on your assets or business even after you have paid your loans back in full.

And unfortunately, most companies do not have to tell you when they have taken out a UCC-1 lien on your business. It’s up to you to keep track of liens on your business.

How to Find UCC Liens Filed Against Your Business

If you have ever taken out a business loan, you may very well have a UCC lien against your business. This can be true even if you have already paid your loan back in full. In some cases, you could even find out that a company you never even did business with has a UCC lien out against your property.

To find out whether you have a UCC lien filed against your business, check with your state’s Secretary of State’s office. Most searches can be done online, but can cost a nominal amount.

If you’d like, you can download this free guide that reveals where you can look up UCC liens in all 50 states, the District of Columbia, and Puerto Rico.

While the UCC lien is a little known aspect of business lending, it’s one that can dramatically affect the ease and speed of your borrowing process. Delays like these can, in turn, affect your working capital and negatively impact your business.

Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith is a resident Finance Advisor on American Express OPEN Forum and an avid business writer.

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