UCC Filing

What a UCC Filing Does

Under the Uniform Commercial Code, lenders can file a financing statement (UCC-1) with the state secretary of state to publicly record their security interest in a borrower's assets. This "perfects" the security interest — giving the lender priority over other creditors if the borrower defaults.

Common secured parties filing UCCs against small businesses:

• SBA lenders (blanket lien on all business assets)
• Equipment lenders
• Invoice factoring companies
• Merchant cash advance providers
• Equipment lessors

Why It Matters in Acquisitions

In an asset sale, the buyer wants to receive assets free and clear of encumbrances. Any existing UCC lien on those assets must be released before or at closing. This typically happens via:

1. Payoff: The seller uses closing proceeds to pay off the underlying debt; the secured party files a UCC-3 termination statement
2. Release: The secured party agrees to release the lien on specific assets being transferred (common with equipment lenders when some assets are being left with the seller)

The UCC Search

Before LOI, buyers should conduct a UCC search in:

• The state of the business's formation
• Every state where the business operates
• The county where the principal place of business is located (for fixtures)

UCC searches are public record and typically cost $10-50 per search. Many title companies and attorneys include them in due diligence.

The Merchant Cash Advance Problem

A growing issue: businesses that have taken merchant cash advances (MCAs) frequently have multiple UCC blanket liens outstanding from different advance providers. MCAs may have been stacked — multiple lenders all with blanket liens. Clearing these at closing requires payoff of each advance, which may be more than the stated balance due to prepayment premiums.