Business owners must learn a new language when shopping for financing. The lending industry jargon is confusing and can even be misleading. One phrase that will be new to the entrepreneur is UCC Lien. It sounds bad! Liens are bad, right? Liens show up when bills are past due. Liens might show up when bills are not paid, but not a UCC Lien.
UCC stands for Uniform Commercial Code. It is laws and regulations that govern business in all 50 States. The UCC Lien is also called a UCC-1 or a financing statement. I like to call it a collateral statement. The UCC Lien lists the collateral the borrower’ business is pledging to the lender. For the lender to have their collateral recognized by other lenders and the bankruptcy courts they must file the UCC-1 with the Secretary of State. By law the lender must have the borrowers signature authorization to file the UCC Lien.
Check the Fine Print
Even the collateral can be confusing. Accounts refers to the borrowers outstanding invoices or accounts receivable. Equipment is usually specific to the machines serial number. What a lender calls a blanket lien is a full page in tiny font that states that ALL of the business’s assets are pledged as collateral to the bank. For most financial institutions this is standard procedure. The borrower must decide if the financing they are obtaining with this UCC-1 will be enough for their cash flow needs since they will have no more assets to pledge for another loan.
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The biggest surprise many business owners get is that their lender never told them they were going to file a UCC-1 but hid the authorization in their paperwork. Shocking! If a business owner does not have a financial background, they should have their attorney give a quick read to any financing contract to avoid any surprises.
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