The most important UCC regulation affecting small businesses is the UCC-1 form, also known as a Financing Statement. When a lender secures interest in a borrower's personal property used as collateral, the lender files form UCC-1 with the state's Secretary of State Office (or equivalent state records office). Lenders can also file UCC-1 forms in multiple states if a borrower has business locations in multiple states, or moves from one state to another. "Personal property" means non-real property used in operating a business, such as equipment, furniture and inventory.
The UCC-1 form serves as a public notice of a lender's interest in the assets for a business. All information on a UCC-1 form is public information. Before a lender makes a secured loan, it does a lien search in the state's UCC filings database to make sure no other UCC-1 form has been filed against the borrower's collateral. If more than one lender files a UCC-1 against the same collateral, the one filed first has a priority claim should the borrower default or go bankrupt.
For example, the SBA's 7(a) Program loans typically require a first lien security interest on all business assets. This is known as a blanket lien. The SBA lender files a UCC-1 on any equipment or machinery. For example, if you lease some equipment, the leasing company may do one of two things: (1) file its own UCC-1 form with the understanding that it is already a blanket lien or (2) establish a subordination agreement with the SBA lender that essentially allows the leasing company to recover its assets. If a subordination agreement is not made between the SBA lender and the leasing company, the SBA lender has a right to cover the leased assets until the blanket lien is satisfied.
Once a loan is paid off, the borrower should ask the lender to terminate the UCC-1 filing. Lenders will not proactively terminate these filings.
Remember that laws vary from state to state, so you should consult an attorney on matters concerning UCC filings, liens and security agreements.
