About 50% of small businesses will fail within five years. And while there are many reasons for this, one of the most common problems that cause businesses to fail is poor cash flow management.
A business might fail, not because they don’t make enough money, but because they don’t have even cash flow to make it through a particular month or season.
That’s why business loans exist, and why there are so many business lenders available.
And to provide business loans quickly, lenders will need to file a financing statement that describes the loan and the collateral used to secure the loan.
These financing statements are so important to both the lender and the borrower. But not all statements are equal. Wondering what the difference between a UCC 1 financing statement and a UCC 3 statement is, and why it matters? Read on below to learn all about UCC financing now.
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What Is a Financing Statement?
UCC stands for Uniform Commercial Code. It’s a nationally recognized standard, followed by all states, to make things as easy as possible for businesses, lenders, and government entities overseeing the commercial landscape.
And a UCC financing statement is what business lenders will file with their local government each time they make a business loan. Why do they do this?
Whenever a business applies for a loan, they will need to secure it, in order to get reasonable interest rates, unlike a credit card. This happens by offering up collateral.
Collateral can be business property, business equipment, or personal property like the owner’s primary residence. It can also be any other asset that a particular lender is willing to accept.
The lender writes and files the finance statement to legalize the loan. It acts as a lien against the collateral that the borrower has offered.
So if the borrower defaults on the loan, the UCC statement protects the lender by showing every interested party that the collateral must first go to them, to satisfy the loan obligations.
If the borrower uses the chosen collateral multiple times, on multiple loans, then the financing statements determine who gets paid out first from the collateral.
So these financing statements are vital to lenders, as it protects them in the event a borrower stops making payments.
Different Types of UCC Financing Statements
The above description of a generic UCC financing statement is more formally known as a UCC1 financing statement. They are the most common type of UCC form, used primarily to document lien status on collateral.
It works to prevent legal disputes regarding any party interested in the collateral at hand.
Most UCC1 filings are for businesses applying for commercial financing. However, there are instances where individuals receive them as well.
Very rarely is a standalone UCC1 used without other UCC statements. The other type of UCC form you need to know about is the UCC3.
What Is a UCC3 Financing Statement?
UCC3 financing statements are amendments to the original UCC1 financing form. They are not standalone documents but require an existing UCC form.
Lenders can use them for many different purposes, unlike a standalone UCC1 form.
You can use them for amendments when edits or changes need to be made to the original form. If you find errors on the original forms, you can file UCC3 change statements to correct them, before any legal action can take place.
An assignment is when the lender exercises its rights on the collateral. This is an alteration to the original form, so a UCC3 is needed.
If a UCC1 is to be continued past its maturity date, then a continuation UCC3 is to be filed, which extends the maturity date by five years. By default, UCC filings are only valid for five years. If a continuation isn’t filed, then the lien is voided after the five-year period is up.
And if the lender no longer has a financial interest in the collateral, such as when the loan is paid off, a termination UCC3 is added to the original form.
Tips for Filing UCC3 Statements
If you’re filing UCC1 statements, you’re going to also be filing UCC3 statements. They go hand in hand. So it’s important to know how they work.
For example, when filing a UCC3 statement, to name the original, you can only file for one change at a time. So you cannot file an amendment and a continuation at the same time, in the same UCC3 form.
You would need to file two separate UCC3 forms in order for either to be accepted.
It’s also important to file changes as soon as you can. For example, if there are errors on the original form, you’ll want to amend those right away. If something happens and you need to exercise rights on the collateral, you may run into trouble if the errors were still present.
Removing UCC Liens
When a borrower pays off their loan, the lender (secured party) no longer has any financial interest in the collateral. But that doesn’t mean the UCC filing automatically dissipates. It will still exist in the public records until it is removed.
The secured party should file a termination as soon as possible after a borrower pays off their loan, in order to avoid complications in the future.
If the secured party doesn’t do this, then the borrower can do so on their own. If they visit their local secretary of state, they can swear under oath that the loan was paid off. The secretary of state can then terminate the UCC filing on their behalf
Know Your Forms and Your Rights
Whether you are a new business lender or are a business owner seeking financing, it’s important to know how a financing statement works regarding UCC rules.
As a lender, you need to be aware of the difference between UCC1 and UCC3 forms, and use each one accordingly, and in a timely manner. Otherwise, it can be harmful to both you as the secured party, and the borrower.
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