UCC Origination: Part I

Where does a UCC originate from?

Typically when a debtor (entity or individual) agrees to pledge assets to a secured party, usually a lender, for a loan or line of credit, a security agreement is signed. The security agreement provides the secured party with the ability to use specific assets as collateral. Once the loan is finalized, a UCC lien is filed against the assets pledged, which gives notice of the lender’s rights to the public.

On average UCC’s follow strict priority, the first secured party to file a lien against a debtor will have first rights to that asset or assets listed on their particular UCC. In the situation of a defaulted loan, the lender is essentially holding their ‘spot in line’ to collect on those assets pledged.

For example, if there is a piece of equipment that Lender A filed a UCC on, and Lender B also files a lien on the same piece of equipment, Lender A has first lien position rights to the equipment. If the debtor has defaulted and the equipment is being sold to pay debts, Lender A will be paid off first, and Lender B will receive any leftover funds after the first priority lien position is completely repaid.

There are two types of collateral for a UCC: Blanket or Specific.

A blanket lien takes ALL current, and at times, future assets of the debtor as collateral. This UCC is common for traditional, SBA and alternative bank loans. Traditional and SBA bank lenders use blanket liens to fully secure the loan. All assets of the debtor are factored into the lending decisions. When businesses do not have a lot of hard assets for a loan, they may seek out an alternative lender, at times it’s the only way to get funding when there is not enough assets to satisfy a standard loan. Blanket liens are preferred because the loan is secured with all debtors assets instead of just a single asset. The underwriting process is typically more flexible when dealing with a blanket lien, it allows lenders to provide funding more quickly. Also, lenders are usually willing to take a 2nd or 3rd position when the loan is short-term.

Conversely, a UCC can lay out specific collateral items. This type of lien protects one or more assets to secure the loan or credit agreement. Specific collateral liens are most common for loans that have a specific purpose, such as inventory or equipment financing.

The following are some common types of specific assets that might be listed on a UCC filing:

Commercial instruments (such as drafts or promissory notes)
Equipment (multiple types)
Inventory
Investment securities
Large operating equipment
Letters of credit
Office equipment
Real Estate (including fixtures)
Receivables
Other goods or intangibles owned or used by the debtor
Vehicles

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