Getting a loan from a bank? You might want to look at their UCC lien policy first. What is a UCC lien and how does it affect your fundability? In this episode, Merrill Chandler takes a deep dive into the definition of UCC liens, how they can destroy your chances of being fundable and what you can do to fix it. He also teaches you where to look for UCC liens in some of the biggest credit reports. This is an extremely detailed and technical episode, so take the liberty to take notes!
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How UCC Liens Can Destroy Your Chances of Being Fundable
This is some mind-blowing stuff we’re going to be talking about in this episode. We’re going to be talking about UCC liens and how they can either bless or condemn your fundability for your business.
We are talking about UCC liens. UCC liens either have huge misconceptions about them or many borrowers, especially business borrowers do not even know they exist. We’re doing a little deep dive into what the UCC is and how it applies, and how it can harm your fundability, especially for your business. What is the UCC? The UCC is called the Uniform Commercial Code. By Uniform Commercial Code, it was not originally a law. It was designed by a national conference of commissioners who studied every single state’s commercial code. The commercial code is an organic gathering of how you treat sales, how do you treat a commercial relationship? How do you treat inventory? It’s all the rules and laws governing interstate and intrastate business dealings.The number one rule in UCC liens is, 'First in time, first in line.' Click To Tweet
In 1952, the first conference was held of all the state commissioners who governed. Think of it as all of the secretaries of states and all of the department of corporations pulling out of their archives all the little rules that everybody had been accumulating on their own. They wanted to make it uniform so that if state A was selling something to state B, they had the same rules of conduct, the same protocols, the same of what became ultimately as the statute and to a significant degree, most of the states are nearly identical in this Uniform Commercial Code.
This national conference of commissioners gathered together and they update. Some things were far out of date, different parts of what they call the code. The code was abolished for some reason and updated in other areas, but the code became state law. It was like the background research for lawmakers to put into the state statutes. The Uniform Commercial Code has been adopted in its near uniformity across all 50 states, territories and possessions. There are a couple of American Samoa and Puerto Rico.
American Samoa hasn’t even adopted any of the commercial code but there are significant parts in Puerto Rico where they haven’t adopted it in its entirety, but of the continental United States, Alaska, and Hawaii, the vast majority are uniform. Why is this commercial code important to you especially as an entrepreneur, a small business owner, real estate investors, etc.? First of all, I want to talk about the two types of liens. The Uniform Commercial Code allows one business to put a lien against another business. These liens come in all shapes and sizes, but there are two main types.
There’s a specific type of lien. Let’s say a leasing company gives you a specific equipment, and then they put a lien against that equipment. If you fail to pay or the business fails with what they call default or bankruptcy, Chapter 11 bankruptcy for businesses, then they can come and pick up that specific lien asset, in this case, equipment. There’s also what’s called a blanket lien. A blanket lien puts a lien on any assets you have as a company, as an entity and as an organization. These blanket liens are usually used currently when someone has lent money.
In 1952, the commercial code was released after ten years of development. ART stands for articles. There are different articles and they’re general provisions. That entire section, article one is about definitions and rules of interpretation. This is like arcane knowledge. They’re defining what a sale is. They’re defining what a piece of inventory is. They’re defining how you can have two different things in a package and how to define the two different things. It’s like a nightmare. Article two deals with the sale of goods. They define sale. Also in 2A, there are leases where you’re leasing goods, etc.
Article three is about negotiable instruments. These are promissory notes and drafts. Drafts are commercial paper, which we know as checks. Bank deposits and collections are in article four. Promissory notes and drafts, a check is literally a promise to pay. There are precise rules of engagement with each one of these. 4A is fund transfers. That’s transferring funds between banks. What are the rules of engagement between transferring funds? Number five is letters of credit. This is where we get in with business lines of credit and you can see how archaic the language is.
A letter of credit simply means that I have the ability to draft against a certain amount. We call that write a check and do a deal. The archaic language is all about letters of credit. That’s what we call a credit line or even a credit card. Technically, those fall under these letters of credit. They are not negotiable instruments. Remember, we talked in a previous episode about installment loans being promissory notes and the actual promissory notes. The paper itself is a valuable financial instrument and that only the person who owns that and who has it in their possession has the power to collect that instrument.
Bulk transfer and bulk sales are in article six. Warehouse receipts, bills of lading and title documents are all under article seven. Investment securities is under article eight. Secured transactions and the security interest under article nine is what is guaranteeing under negotiable instruments. Under letters of credit, you have the actual credit line that lets you write checks or the installment loan that allows you to receive money from a bank and then invest it or use it. Under article nine is where if somebody makes it secured, that’s where the UCC liens come into play. UCC liens are governed by article nine and these are security interests.
This is the Uniform Commercial Code chapter 9A. Notice definitions and definitions, what is an account? What are accounts? What’s an account debtor? Does it not include persons obligated to pay a negotiable instrument even if the instrument costs due to part of the chattel paper? There are 88 pages of all these specificities. It’s super highly-defined about negotiable instruments, when initial financing statements suffice to continue the effectiveness of financing statement. Nobody wants to read this stuff, but what I do want you to see is notice that it says reviser instructions, chapter 225 in the 2013 general session. It was enacted by chapter 225 in the 2013 general session.
These are when that governing body making recommendations, how they are updating these across all 50 states. That’s one of the things you can count on from us. There have been no general updates to the UCC since 2013 that deal with promissory notes, lines of credit and secured instruments. Notice here’s enacted chapter 252, the 2000 general session. I wanted to show you that there’s a lot going on behind the scenes of what constitutes credit and what are the rules of engagement for promissory notes separate from credit lines and credit cards revolving accounts separate from secured.
There are hundreds of pages for this uniform commercial code. What I do want you to understand is that there’s something completely different about this. First of all, we covered the specific types. There’s a specific lien for leaning a particular asset that has been lent to you or engaged and blanket liens. The UCC does not apply to real estate transactions. It’s a completely different. That’s real estate code. It does not govern service contracts. That means between a service provider and a client and a customer. It’s the sale or leasing of stuff or the lending of money, which if you think about it, the renting of an object. Renting your person to do a job for somebody else, which we call service contracts or service providers, providing services to a client, those are not governed by the uniform commercial code but it does cover the extensions of credit.
One thing you need to understand about uniform commercial code is that it’s first in time, first in line. If somebody puts a UCC filing, it’s called filing a UCC-1, which is the intent to lien assets. If they file a UCC-1 on your business, let’s call it a blanket lien, then they are the first ones and if it’s for $25,000, they get the first $25,000 of any of your assets. It may be in a sale or a dissolution or a bankruptcy. First in time, first in line. Many of you may be more familiar with a real estate lien. There are a couple of different liens, which we’ll be covering in a different episode. A real estate lien, if there’s a lien on your property, you have to pay that off even before you pay the loan back. It is in first triple first position. You don’t pay it after the loan is paid back.
Let’s say it’s a mechanics lien where somebody put in flooring on your fix and flip. That flooring, they did work and services and you did not pay that. They can put what’s called a mechanics lien against that property. That mechanics lien, before it can be sold to another person, and depending on the state because mortgages and real estate are governed by the state, it has to be paid before another party can take possession of that loan. Mortgages are, by custom, paid first but a lien has to be paid before the actual conveyance of title, before the transfer of title can be paid. The exact same thing occurs on a UCC lien.If you’re going to work with banks that file UCC liens, make that they’re one of the latter ones that you’ll adopt. Click To Tweet
If there’s a loan on the business, you pay off the loan, but when you sell that business, the lien has to be paid before it transfers to a new owner, before possession of that business and title to that business is transferred. We have to be aware that if we’re going to get business lines of credit or business loans, most business credit cards do not add a lien for all tier one and tier two. I’m not even aware of tier three banks or credit unions, community banks that do that. Any tier one or tier two bank that puts a UCC lien for a credit card, they’re counting on you as a borrower individually even if it’s strictly a business instrument.
There are numerous lenders out there who will put a UCC lien, a general blanket lien against your business for credit lines and/or business loans. Loans tend to have more because what they’ve done is given you a chunk of change. If they gave you a $100,000 loan, you owe them $100,000. Business loans may have a UCC lien because they delivered the entire amount. Let’s say you have a $25,000 business credit line. They will put a UCC lien for $25,000. If you only you sell the business or it goes into default or bankruptcy and there’s only a $10,000 balance, then the language of the UCC filing is up to $25,000.
Let’s take a look at a couple of those lenders. SBA is $25,000. Any small business administration backed loan, anything of $25,000 or higher gets a blanket UCC lien. We’ve had clients call in that they’ve gotten an EIDL loan. If it was over $25,000, it says in the paperwork that a lien will be placed against it. Since we have many clients who are interested in getting $200,000, $300,000, $400,000, $500,000 in credit, then we help our clients vet banks that do not use a UCC filing or we find out what that limit is. SBA, universally, will put a lien on any loans that are backed by them because they want for $25,000 or more. You need vet every other bank. If you’re in our Momentum Mastermind, we go through and show you and work together on vetting these banks and asking the 26 questions that help you understand which banks you want to work with.
Here’s what’s fascinating, the EIDL loans through the whole Coronavirus and the pandemic, many of our clients only took up to $24,000 of whatever was offered to them. First in time, first in line with these UCC liens, so it wouldn’t interrupt their opportunities to go out and get another financing from other businesses. If you have a lien, the danger of a lien and why it’s not good to have a UCC lien on your business credit reports or held against your property is because you’re telling other lenders, “Don’t lend to me because these guys are first. They’re going to get the first $25,000 in our assets.”
Nobody wants to be 2nd, 3rd, 4th or 5th. If you’re going to be vetting banks, if you’re going to be asking, it is vital to find out what their UCC lien policy is. It will be executed per the UCC guidelines and the statutes of your state. Here are a couple of things that we have done for some of our clients is that if you have a UCC filing, or you find a bank that you want to work with, but they have a UCC filing of $50,000 or $25,000, then you add those to the end of your 2, 3, 4, 5, 6 banks, so that the very last one that you get is the one with the UCC filing.
If we’ve got some banks that you want to work with, but they have a UCC filing policy of $25,000, $30,000 and some go as high as $50,000, then you want to have it so that you engage them as one of your banks, as one of the latter or last ones. Let’s say KeyBank put a lien and they may be the last bank you engaged, but they’re the first one to get paid. If you’re going to work with banks that file UCC filings, UCC liens, make sure that they’re one of your latter banks that you adopt.
Notice this is the Experian BCR, Business Credit Report, as of the end of last year 2019. Notice that payment trade lines and UCC filings says bankruptcies, liens, judgments and collections. There are zero UCC filings in this area that is telling us that nothing is being reported there. Let’s take a look at Equifax and you’re looking at liens filed an open, released, none reported. We have none reported over here, but this is where you’re going to find it.
Finally, you’re going to find it on Dun & Bradstreet’s credit report. Every one of these credit reports update their look and feel almost quarterly. Notice for public filings, no public filings available for this company. These are the three major business credit report and I’ve shown you and told you for those of you who are reading where to find these public filings on Dun & Bradstreet. It’s known as a lien on Equifax and it’s referred to on Experian as a UCC filing. The word lien isn’t even used, even though technically that’s the type of instrument that’s being evaluated or being used.
These liens are completely different. Negative credit, they last or stay, they are held against your business filings for five years. If one of these pop up, we tell our clients all the time that it’s easier to start a new funding entity because there’s no Fair Credit Reporting Act. You cannot dispute this information, especially a lien or otherwise. This is not trying to take a bankruptcy or whatever off your personal credit report. The final thing that I want to cover here is it lasts for five years but when you have retired, if you have closed, there’s a terminus date for all business credit lines. That credit line turns into an installment loan to make monthly payments down to zero.
The second that credit line is paid off or the second any of your business loans are paid off, you need to then file what’s called a UCC-3. A UCC-1 is putting a lien against your business assets, either specific or blanket. A UCC-3 is to file that the obligation or commitment has been terminated. You’ve paid it off and you are requesting the removal of the lien from your business credit reports. You file it with the state and then the documentation that says it’s been removed you then forward to your business credit reports, so that they ensure removing that lien from your business credit.
I know this episode is highly detailed about specific things. We just had our 100th show. Starting these next century of shows, in the next 100 shows, we’re going to be tightening up even more and more the very things to help you in every deep dive that you need to do. If you’d like to the fast track all of this, go to GetFundableBootcamp.com and join me. Get on the path to your fundability and let’s do this together. If you’re committed to the show’s variation of this, I promise to be delivering even more technical data. Now that we’ve covered the lion’s share of the general topics, we’re going to start going into greater and greater depth on how all of this will help you in your business funding and help you prepare to make the right decisions regarding which lenders to use and how to grow your funding business. It’s an honor to always be here as part of these shows.
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