How UCC Liens Affect a Business Loan Application: 5 Questions Before Refinancing

If you want to get a new loan or refinance for your business, a past UCC filing is not an automatic roadblock. It’s something that the new lender sees, and they usually want first position on the collateral, like the business equipment. That may mean paying off, releasing or subordinating the past loan. Before even shopping for new money, get answers to five questions about the past loan or lien.

The financing statement is the UCC filing that publicizes the loan and the lender’s interest in the collateral. You need to get this official record from your state’s filing office. Also, a credit report may show it. The record shows what exactly is collateral, and if it covers one thing or many (a blanket lien). You should check that statement against your signed security agreement. The text of the notice doesn’t show the amount, so seek answers from the past lender. Match each notice with your loan and contract. Of course, some might be for an old debt already paid. Pay attention to the dates. Maybe you paid a debt, but the lender never released the lien.

A UCC filing is not a mark against payment history. A UCC filing on a credit report may bring questions from the lender, so be ready with answers. A blanket lien raises more questions than a single machine lien. Even offers that say they are unsecured may file a UCC notice. Read those papers carefully. A small business lien does not automatically cover personal assets like your home. Your guarantee as owner is a separate legal promise, beyond the lien on the assets. Some lenders ask for both the guarantee and security interest.

Priority

What you want to know is whether this past lender is first. If the past lender filed its financing statement before others, then it’s most likely first to get paid. The new lender would be second in line, or a junior lender. A junior lender may recover little or nothing, if the sale of collateral falls short of satisfying the earlier loan. New money is very cautious here. That shapes the lender’s approval, and the amount and terms, if approved.

Keep in mind that priority is not always first-come, first-served. A purchase-money lender, one who financed the equipment to buy it, may have special status. Creditors can agree to switch their rank. The filing date alone doesn’t always tell the full story.

The new lender may accept second position on the collateral or ask for a limited release of a blanket lien. If not, the new lender may try to negotiate subordination of the past lender’s right to the collateral. Another option is a refinance of the old debt, moving that first position to the new lender. The new lender can also take a security interest in other assets, or, of course, simply decline the loan.

A financing statement generally expires after five years, but a continuation statement filed before then keeps it active. The lender can file a continuation only in the last six months before the five years are up. A lapse of the UCC filing doesn’t necessarily mean the debt is paid. Also, an uncanceled financing statement is still effective even after the debt is paid in full. A registered termination statement is needed to release it.

Most rules require the past lender to issue a termination statement when the loan is paid off and no more credit is promised. Send your written demand, and keep a copy. The past lender must issue that statement or a UCC-3 termination notice within 20 days. If the past lender ignores your demand to release the lien, you can file your own UCC-3 termination notice. It should say clearly that you authorized it. The lender may owe you $500 plus actual damages.

A zero balance or a payoff letter alone doesn’t end the UCC filing. The old lender usually must file a UCC termination notice (UCC-3). Check the state UCC online index, where filings are listed, to make sure that happened. Save your printed copy of the UCC-3.

You might see a confusing or unclear lender’s name on the search results. This can happen if a third-party “representative” or “masking agent” was named to make the UCC filing. Double-check that the filing number and collateral description match the loan documents you have. First try the contact information for the secured party shown on the lien notice. Be sure to cross-reference names with the official records, before sending any money. Contact the representative’s inquiry process, which can identify or reach the lender. Be ready with the UCC filing number and the state where it’s on file, if you know. Remember, a representative may lack authority to release or end the filing.

A clear UCC search does not mean the business has no liens on its property at all. It takes separate searches in court and government agency records to find judgment liens, mortgages, tax liens and the like. The IRS tax lien covers all property, including accounts receivable. This is wider than a UCC filing that you see in a business profile or search. The IRS can issue a certificate of subordination so that the new lender gets the collateral first in the event of nonpayment or default. The IRS releases its tax lien within 30 days after payment of the tax.

If one of your past debts is a merchant cash advance, refinancing it with an SBA loan is not possible unless the advance had been converted into a term loan, been paid down for at least 24 months, and has no new advances.

Before you apply, gather current balances, payoff instructions and security agreements for each existing loan. You should know the assets the new lender can take as security, whether it requires personal guarantee and who handles payoff and termination. Get their final answers in writing to make sure there’s no last minute misunderstanding about the terms. Avoid any rushed new loan closing before the new lender gets proof of termination or release of the old liens.