Uniform Commercial Code (UCC)

About the UCC

The Uniform Commercial Code is a comprehensive set of laws governing commercial transactions between U.S. states and territories. These transactions include borrowing money, leases, contracts, and the sale of goods. The UCC is not a federal law, but a product of the National Conference of Commissioners on Uniform State Laws and the American Law Institute, private organizations that recommend the adopting of the UCC by state governments. State legislatures may either adopt the UCC verbatim or may modify to meet the state's needs. Once a state's legislature adopts and enacts the UCC it becomes a state law and is codified in the state's statutes. All 50 states and territories have enacted some version of the UCC.

UCC Filings and Small Businesses

The most important UCC regulation affecting small businesses is the UCC-1 form, also known as a Financial 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, 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. Now, let's say you lease some equipment. The leasing company may do one of two things: (1) file its own UCC-1 form with the understanding that 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.

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