Running a small business is challenging, and financial hurdles can make it even tougher. One obstacle that might catch you off guard is a Uniform Commercial Code (UCC) lien. You might have heard of it, but what does it mean for your business?
A UCC lien can feel like a storm cloud hanging over your company, affecting everything from your credit to your growth potential. This blog outlines what you need to know about this legal tool and how it can impact your business.
What entrepreneurs should know about UCC liens
A UCC lien is a legal tool lenders use to secure their interests in a borrower’s assets. When a business takes out a loan, the lender may file a UCC-1 financing statement with the state, listing the assets that serve as collateral.
This filing informs other creditors about the lender’s claim and establishes a public record of the lien, which is available online. UCC liens can cover a wide range of assets, such as:
- Real estate
- Inventory
- Receivables
- Vehicles
- Machinery and equipment
Once filed, these liens typically last five years but can be renewed if the loan remains active. While not inherently harmful, it can impact businesses in several ways, especially if the borrower defaults on the loan or seeks additional funding.
The impact of a UCC filing
UCC filings appear on your credit report for five years. They usually don’t affect your credit score unless you make late payments or default, which can damage your credit. Potential new lenders can view these filings and consider them when deciding whether to approve a loan, making it essential to clear any outdated liens.
A UCC lien also puts your assets at risk if you fail to repay what you owe. Repayment ensures your assets remain secure; otherwise, the lender can seize them to recoup losses.
An existing UCC lien also can be a hurdle when seeking additional financing. New lenders may be reluctant to take a second position on your assets, potentially leading to loan denials or limited funding options.
By staying informed about your business credit, managing your assets wisely, and clearing up any outdated liens, you can minimize the impact of a UCC lien on your business. With the right approach, you can continue working to grow your business with confidence even after debt.