When a small business owner defaults on a loan or advance, usually the first thing alternative lenders utilize are UCC liens. UCC actions from liens hit small business owners fast and hard. In many cases some of the worst alternative lenders will cause massive amounts of harm to occur to small businesses and their owners. This article describes some of the actions that small business owners should be aware of, especially if they have issues with their alternative loan/advance.
By Thomas Tramaglini, Chief Operations Officer
Partner, The Center for MCA Research
UCC Liens and Actions are a valuable tool for alternative lenders.
Small business financing as a whole is awful. Few banks are willing to lend to business owners so when small businesses need financing for their company they are forced to take on high-interest/ra te, short-term, alternative loans and cash advances which are hard to pay back. Some estimates suggest that default rates are over 50% with some alternative lenders.
So, when alternative lenders are hedging their bets on a small business paying their debt, the lender knows that they can revert to some important tools when their client defaults.
UCC liens and actions are one of the most valuable that alternative lenders utilize in collections and the use of UCC actions for sure hit many small business owners hard.
What is a UCC lien?
A Uniform Commercial Code filing, also referred to as a UCC filing or UCC-1 financing statement, is a document that lenders utilize to assert their legal claim to assets that a borrower uses to secure a loan. This notice permits the lender to take possession of the borrower’s collateral in the event of default.
UCC filings may pertain to a specific piece of collateral, or lenders may file a blanket lien, which covers all of a borrower’s assets. Filing a UCC lien is a standard practice among lenders when providing funds to small businesses.
How does a UCC Lien work?
A UCC filing serves as the formal notification lenders use to declare their security interest in a borrower's assets or property. This filing creates a lien against the collateral the borrower pledges to secure the loan, granting the lender the primary right to claim that collateral for repayment in the event of default.
UCC liens are generally filed using a UCC financing statement, also known as the UCC-1 financing statement.
This document is filed with the secretary of state’s office in the state where the business (i.e., the borrower) is located. The UCC-1 financing statement specifies the assets or properties the lender has a claim to and informs other creditors of its security interest in that collateral.
UCC liens can be filed on various personal and/or business assets, including but not limited to real estate, inventory, receivables, vehicles, machinery, and equipment.
Once a UCC lien is filed with the secretary of state’s office, it becomes part of the public record, allowing anyone to go online and check for any active UCC filings.
Although the specifics may differ from state to state, UCC filings typically last for five years. If your loan remains active after this period, your lender can request a continuation of the lien. The lender may also file amendments or addendums to the statement if needed.
Small business owners give the alternative lender permission to use UCC actions in their agreements.
Once the initial information about the alternative loan or merchant cash advance is presented to the business owner, most contracts outline the use of UCC liens and potential actions against the client. These sections are almost never read, likely not understood by the business owner(s), and are never highlighted during a funding call.
However, when small business owners who default find their vendors or clients are not paying them, they should realize that they granted the alternative lender permission to cause significant disruption and, in some cases, financially ruin them.
It should be noted that if a small business owner defaults, they have often allowed themselves to be harmed in numerous ways. Most UCC actions are indefensible, so small business owners should be aware that alternative lenders are likely a step ahead of them.
Many small business owners are forced to give blanket UCC liens and disclose who is paying them before their alternative loan/advance is funded.
When small business owners are being funded, in many cases the alternative lender asks for trade references or vendors who do business with their company. Although bank statements show a lot about your business, when small business owners disclose who their payers are this makes them fair game for a UCC action.
So, when a business defaults, they can surely look to the payers as a first line of offense for the alternative lender.
How Long do UCC Liens last?
If your debt is not paid off, UCC liens can last up to five years.
How can UCC Liens be removed?
UCC liens cannot be removed unless the following happens:
The alternative lender agrees to remove. This happens when your debt is paid off.
If you believe and can prove you do not have a debt you can challenge the filing in your states Secretary of State office.
What UCC actions do small business owners use?
Basically, until there is a payback plan or your balance is paid in full, the MCA company has the authority to:
Harass your suppliers.
Stop your payroll from funding.
Harass your customers.
Freeze your customer payments.
Freeze your assets.
Freeze your bank accounts.
Hold funds collected by your credit card processor.
Hold funds with a licensing agent.
Many others...
Contact Beacon Client Solutions to better understand your situation and how we can help you.
Dr. Thomas Tramaglini is the Director of Operations and Negotiation for Beacon Client Solutions, a company that supports small businesses on a host of fronts, especially MCA debt. Thomas has been a small business owner for many years, as well as held leadership positions in several organizations and companies. Thomas holds a B.A. in History, as well as Masters and Doctorates in Organizational Leadership from Rutgers University, The State University of New Jersey.
Disclaimer: Beacon Client Solutions is not an accountancy, or a law firm. We are business consultants. While Beacon works with outstanding attorneys and accountants, we cannot and do not provide legal or tax advice. All of our work is connected to those who are legally certified to give such advise. Beacon does have a longstanding body of work in MCA resolution and understands what small business owners deal with, specific to MCA. Beacon Client Solutions serves clients in all 50 states, Puerto Rico, Mexico and Canada.
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