Most lenders prefer to secure their loans against something substantial that belongs to the borrower. A mortgage is secured by the property being purchased, an auto loan is secured by the vehicle and so on.
So it is with most business loans. The lender wants some assurance that you, the borrower, will be motivated to pay off the loan and that it can get something of value if you ever default. For small businesses, this often means a UCC lien filing.
The UCC and small business loans
The Uniform Commercial Code is a set of business procedural laws. While the UCC does not itself have legal force in any state, most states have enacted some or all of it into their laws. One of these rules allows a lender or creditor to a small business to place a UCC lien on property and other assets belonging to a debtor business, such as:
- An office, store or other real estate in the business’s name
- Vehicles, such as a delivery van or company car
- Equipment and materials
- Accounts receivable and promissory notes
If the debtor business fails to keep up with loan payments, the creditor can then seize the property subject to the lien. There are also blanket liens that cover all of a business’s assets.
Is a UCC lien dangerous?
A loan with a UCC lien attached is not necessarily bad for your business, especially when you are looking for capital to start a new business or keep yourself afloat during tough economic times. But there are downsides to having a UCC lien hanging over you. For one thing, once a lien is attached to an asset, you cannot use it as security for another loan. And there is always the risk of your creditor seizing your business assets.
If a creditor is threatening to seize your business’s assets using a UCC lien, you might have little time to respond. UCC liens and their impact on small businesses is an area of the law practiced by just a few attorneys. Having one of them advising and representing you can help you save your company.