When applying for financing, nearly all lenders will file a lien, known as a “UCC-1”, against your business —and Dealstruck is no exception. Article 9 of the Uniform Commercial Code governs what lenders have “priority” in the collateral of the small business in the event that multiple lenders collateralize the same assets. A lender with priority over another lender in the same collateral has first rights to the assets of the borrower in the event of default.
The UCC-1 Financing Statement contains a description of what collateral is being used to secure the loan. Most banks and alternative lenders, including high-cost cash advance and factoring companies, will opt for a “blanket” lien—meaning all assets of the debtor are used as collateral. A collateral description for a blanket lien may be very broad (“all assets” is common) or include a long list of specific assets like accounts, inventory, equipment, et. al. In most cases, Dealstruck is a 1st priority holder of a blanket lien.
There are two keys points to keep in mind about how a blanket lien affects your ability to get financing:
The legal borrower is the BUSINESS and not the owner(s). The personal assets of the owner are not collateral for the loan.
The UCC doesn’t govern liens against building and land. A mortgage is required to secure real estate in a loan.
Certain specialized lenders, such as equipment finance companies, will normally opt to file a UCC-1 against specific assets in order to perfect its lien. This is because it is easier for an equipment lender to repossess and liquidate a piece of equipment in a default situation when the equipment is specifically identified in the lien description.
It’s important for you, as a small business owner, to keep track of what liens may be filed against you, particularly when seeking financing. Here are some key points to keep in mind:
UCC-1 filings expire after 5 years if they are not renewed—even if the loan is still being paid off;
Lenders are required by law to terminate a lien once the loan has been paid in full. Existing liens related to long paid-off loans are more common than you think;
Lenders sometimes file liens that are more expansive than the loan agreement stipulates;
Non-lenders can file a UCC-1 as well. Liens from suppliers and franchisors are common.
Because the main purpose of the UCC-1 filing is to serve notice to the public that a lien exists, determining what liens may be filed on your business is fairly simple and almost always free. Visit your Secretary of State’s website and conduct a UCC search. The following walkthrough shows how a California business can conduct a UCC search to determine what liens may be present.
1) Go to Coordinated Legal’s directory to find the link for your state. The only states that don’t offer UCC searches here are California, Delaware, Hawaii, Nebraska, Nevada, New Mexico, South Dakota, and District of Columbia – to access those a Lexis Nexis membership is required. Scroll down to Ohio and click the “UCC Inquiry Page” link.
2) You are now on the Ohio Secretary of State’s page. Click the “UCC Search” tab. The page that comes up is “UCC Search by Financing Statement Number”, so instead choose “Debtor Search” from the beige box on the left side of the page.
3) Enter “Auto” into the “Organization Name” field.
4) Bingo! You now have list of businesses in Ohio that have had a UCC-1 filed against them at some point in the past. Click the “filing date” column header to sort the results by date, in descending order.
5) Click the “Number” link for the first choice, Autoneum North America, Inc.
And there you have it! You now have the fundamental information of who has placed a lien against Autoneum North America, Inc., and can now used the Secured Party Information to contact the debtor to find out details about the lien.
The process is just as simple for your business, and we are happy to walk you through the process. If you’d like to learn more about how to manage your outstanding leins to increase your chances for securing financing, let me know!