Working with lenders is a key part of building your business. But when you borrow money, lenders will take steps to ensure you pay them back. One tool routinely used by many lenders is the filing of a UCC lien against your business assets. These filings are made with the office of the secretary of state where you reside and create a security interest in your business' assets in favor of the lender. The filing of an occasional lien does not reflect poorly upon your business and is certainly not unusual. But it can, under certain circumstances, make it harder to borrow more down the road. Understanding the lien process can help you navigate around certain pitfalls and avoid future financial problems.
What Is a UCC Lien?
When you form a business as a corporation or limited liability company, one of the key advantages you gain is insulating yourself from personal liability on lawsuits. The only assets a lender or anyone who might sue your incorporated business can get are those that belong to the business itself. As a result, lenders look to take steps to make sure they can collect if you default.
One of the first steps they can take is to file a UCC-1 Financing Statement which creates a lien against your business assets. The first lender to file a lien has the first right to recover if your business fails. To protect themselves, some lenders will routinely file a lien as soon as you receive your funds. Others may wait until they have reason to believe a default may be imminent. Regardless of when it is filed, the lien remains in place until the loan is repaid and the lien is removed.
How It Affects Your Business
The filing of a lien is a completely normal part of the lending process. It may feel frustrating to have this happen when you've done nothing wrong. But, keep in mind that the lender is not attacking you. Just as you put plans in place in case something goes wrong, your lender may take steps to protect itself as well. As long as you pay on schedule, the lender has no grounds to enforce its lien.
Similarly, having a single lien, or even a few liens, on your business does not mean anything is wrong with your business. It doesn't affect your business' credit score, but it can make some new lenders wary of lending to you, particularly if there are several liens in place. Subsequent lenders will fall behind previous lien holders for the right to collect against your assets, so having prior liens in place can reduce your ability to borrow more.
How to Remove a UCC Lien
Once a lien is in place, removing it does not occur automatically. Even after you pay off your loan, someone has to take steps to remove it. Most lenders will take care of this for you as a matter of course. But some less reputable lenders may try to avoid the filing fees that are routinely charged to remove satisfied liens. So it is always a good idea to request that the lienholder file a UCC-3 Release of Lien statement once you pay off your loan. This shows that your loan has been satisfied in full, and the lien is no longer in effect.
About a month after you've made your final payment, you should verify that your lender has, in fact, filed the UCC-3. It's easy to look your business up on your local secretary of state's website to check for pending liens. Never assume that someone else has done the work to protect you. If the lender filed the UCC-3, that lien has been released and is no longer in effect. If not, you need to contact the lender and insist they immediately file the necessary release documents. In almost all instances you won't have to do more than that. But if all else fails, it may be necessary to go to the Secretary of State yourself to file an affidavit that the underlying debt has been satisfied. Presenting documentation supporting your affidavit will be key. If you can demonstrate full payment of the loan, you can have the lien removed.
How to Handle Multiple Liens
If you have multiple liens against your assets, it can endanger your ability to handle new obligations or business emergencies. Your current creditors, particularly those with lower-priority liens, can get nervous and act more quickly if you miss a payment. Other lenders are less likely to help if you do have an emergency come up.
When you find yourself in that situation, paying some of the liens off should be one of your top priorities. Depending on your situation, this might mean paying off smaller loans and doing whatever you can to work through your debt. If you are not in position to pay off the debts associated with those problematic liens, though, a consolidation loan may be the answer. A larger loan that allows you to pay off multiple balances allows you to reduce your number of liens and set yourself up with a single manageable payment.
Protecting Your Business
While having liens in place is normal, you still should check regularly to make certain the information in your business credit report is accurate. Just as in your personal credit report, your business credit report can contain errors. Whether this comes through a lien not being removed or someone entering a lien without the right to do so, it is important for you to watch and contest any errors early.
Beyond mistakes, you should focus on making on-time payments and promptly working to remove proper liens once you satisfy your loans. This demonstrates to both current and future lenders that you take your obligations seriously, and improves both your business reputation and your ability to borrow in the future. Above all, don't panic. Work with the tools you have to keep liens from causing problems.
At Kenmore Capital we take UCC liens very seriously. Most of the lenders we deal with do not routinely file UCC liens, and those that do file the necessary release documentation upon repayment as a matter of course. Contact us if you have any questions or problems with UCC liens that may be affecting your business. We're here to help!