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Increase Your Borrowing Power “Using the Uniform Commercial Code to your Advantage”

As a business owner, if your company is considering making a large purchase on credit or applying for any type of commercial loan based on collateral, as you complete the loan you will have to sign a UCC-1 Financing Statement.

The UCC or Uniform Commercial Code was developed over time as a way to promote uniformity among various jurisdictions to govern commercial transactions. Each state in the U.S. has adopted their own guidelines, although recently new federal guidelines have been adopted to standardize the process. A UCC-1 Financing Statement is a form that must be filed with your State Office of Assessments and Taxation. It is a legal document filed by a lender, signed by a borrower, that specifically lists property the borrower has assigned to the lender as collateral against the debt. It shows the lender as a secured party of record, and assists in determining who has rights to your assets.

All lenders will file a financing statement with the State Government in order to protect their investment in your company. It’s up to you to learn whether the lender is over-collateralized. The lender will make its determination according to the risk involved. The higher the risk that you might default on a loan, the more collateral you will be asked to assign to the lender. Lenders would include: banks, leasing companies, finance companies, and even private individuals.

Surprisingly, few borrowers understand the ramifications of signing a Financing Statement. Once a company has signed away all its collateral in a “blanket” security statement, the options on future use of any part of the collateral are: the secured party would have to voluntarily release parts of the secured collateral, or the debt must be paid in full.

Generally speaking there are four parts of your assets that are available as collateral for borrowing: a.) the accounts receivables, b.) the inventory, c.) the equipment, and d.) everything else of any value. But what owners do not realize is that the UCC-1 is a negotiable instrument. For example, if you are getting a small credit line, but have an established large A/R balance, you can use all or part of your receivables, leaving your inventory and equipment available for future use as collateral. Just like any other part of the negotiating process, there is give and take on the part of the lender and the borrower depending on how badly one or the other wants the business. Because a lender has filed a UCC-1 on your business, it does not necessarily mean another lender would be unwilling to loan you additional funds. Companies regularly have multiple UCC-1 filings on specific pieces of equipment or vehicles.

Here are some hints to be aware of:

  1. Contact your State Department of Assessments and Taxation to order an up to date search of your company records and get copies of any current UCC-1′s. Remember this is public information, and a prospective lender will also do a search.

  2. If you paid off a debt, contact the original lender and get them to sign a UCC-3 termination, and file it with the same State Assessment office.

  3. When negotiating for a loan, don’t stop with the interest rate. Consider your future needs and how the UCC-1 will affect your plans.

  4. After signing a UCC-1, make a photocopy for your records because only the lender will receive an official copy of the filing.
  5. When talking to a lender, let them know right away about your UCC status. This will win you points for being knowledgeable and up front.

  6. Download the National Financing Statement with instructions

-appeared in Small Business News www.sbnpub.com, Nov 1997

Download the National Financing Statement with instructions