What Is a UCC-1 Statement?

A UCC-Uniform Commercial Code-1 statement is a legal notice filed by creditors to publicly declare their rights to potentially obtain the personal properties of debtors who default on business loans they extend. Often abbreviated as UCC-1, these notices are typically printed in local newspapers to alert the masses of the creditors’ intentions.

UCC-1s are required for all business loans under the Uniform Commercial Code (UCC) and establish a relative priority over which specific assets may be seized, and in what order, while solidifying the collection pecking order in cases where there are multiple lenders to the same debtor.

Understanding UCC-1 Statements

The UCC-1 statement serves as a lien on secured collateral, where the components and filing procedures are comparable to the lien requirements in residential mortgage loan contracts. The UCC-1 statement is a directive of the Uniform Commercial Code (UCC), which governs business deals and activities in the United States.

According to the ninth article of the UCC, titled “Secured Transactions,” a lender must incorporate completed UCC-1 statements in a business loan’s contract for it to be deemed effective. The statements must include detailed information about the borrower, and they must itemize descriptions of all assets named as the secured collateral for the loan. While virtually any type of asset may serve as such collateral, the most commonly used items include real estate properties, motor vehicles, manufacturing equipment, inventory, and investment securities such as stock and bond holdings.

As with any ordinary lien, lenders must perfect the UCC-1 statement by filing it with the appropriate agency in the state where the debtor company is incorporated. In most cases, UCC-1 statements are filed with the secretary of state’s office, which subsequently time-stamps the document and assigns a file number to the associated parties.

Types of UCC-1 Statements

Lenders have the option of filing the following two types of UCC-1 statements:

• Specific collateral UCC-1 statements. These are most commonly used in real estate or equipment transactions. They give lenders first-order secured rights to real estate properties or specific collateral such as the equipment purchased with the loaned funds.
• Blanket lien. This gives the lender secured rights to a range of assets, as long as the terms of these liens are detailed in the collateral section of the UCC-1 statement. Lenders tend to prefer blanket or “all-asset” liens.

How a UCC Filing Affects Credit Scores

Like individuals, most businesses have a credit report and score. While a UCC lien will appear on a business’ credit report, it won’t necessarily have an immediate negative impact on the business’ credit score, unless the business should default on the underlying loan.

The loan attached to the UCC filing will also increase a business’ credit utilization ratio, which, if it gets too high, can negatively impact the score. Furthermore, the business won’t be able to use the same piece of property as collateral for a different loan if there is a lien attached to it.

Example of a UCC-1 Statement

Say a construction company named Alex’s Excavation applies for a business loan to purchase two new hydraulic excavators. Bank XYZ is interested in offering Alex a loan, and as part of the contract, it files a UCC-1. Shortly afterward, Alex’s Excavation loses one of its biggest construction contracts, and then another, and the company is forced to file for bankruptcy.

Because the company had several lenders, it’s likely that Bank XYZ would not be given first-order rights to Alex’s property and would have to wait until all other lenders were paid. However, because the bank filed a specific collateral lien on the two excavators, it received the property/cash mentioned in the UCC-1 statement in a timely fashion.

The Bottom Line

UCC filings let creditors notify other creditors about a debtor’s assets that are used as collateral for a secured transaction. UCC liens filed with the appropriate secretary of state’s offices serve as public notice of the creditor’s interest in the assets. To check for UCC filings, visit your website.