The UCC lien protects lenders from authorizing additional loans that contain the same assets as collateral. It allows them to maintain their financial interests. UCCs are public record and proper due diligence should be done as a part of the loan application process to determine which assets are already collateralized. These liens are managed under the Uniform Commercial Code, the code attempts to enforce uniformity in how state jurisdictions process UCCs.
It’s important to know that in most cases, a UCC filing will not have any direct impact on business operations. If no additional borrowing needs exist and the debtor does not default on the loan, then the UCC lien should cause no concern.
However, starting a loan application process there are risks associated with having a UCC filing against assets that need to be considered. Three main risks exist when a UCC lien remains active against a debtor.
First, a UCC may prevent a debtor from obtaining additional financing.
This is the most common effect a UCC can have to a debtor since lenders usually want their debtor to be lien free prior to finalizing a loan.
Secondly, a UCC can impact a credit report. It won’t impact the actual score, but it will appear which will give insight into borrowing history.
Thirdly, there is the risk of losing secured assets. Until the loan is paid off, there is always potential the property could be seized if there is a default.
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