What are UCC (Uniform Commercial Code) Filings, Small Business Laws & How Do They Affect the Business?

The Uniform Commercial Code, or UCC, is an excellent tool for business owners to protect themselves with small business laws as both creditors and as debtors. Using UCC filings to your advantage can stretch your credit with both lenders and vendors. Likewise, as a creditor, if you keep active UCC filings on your biggest customers, you can protect your business against a client's nonpayment. For example, if you have a nonpaying customer and bring a lawsuit against them, you may wait months for a judgment, and you might not be adequately compensated even if the lawsuit rules in your favor. As a small business owner, you could avoid court all together by instead asking this non-paying customer for a UCC filing from the beginning.

Using a security agreement and a UCC-1 form is the best way you can insure your receivables. In a nutshell, a UCC places a lien against a particular small business asset. As a debtor, negotiating a UCC or security agreement with a key vendor will probably get you a larger credit line. However, you should minimize that vendor's claim on your asset(s) on which the UCC is placed. It is important to negotiate very clear terms within each UCC filing or security agreement. Be very careful to make sure the credit line you are getting from the vendor is worth the asset(s) you are putting at risk. Remember: if you allow the lender to specify all of your business assets, you are giving that creditor the ability to seize everything you’ve got.

As a creditor, filing a UCC means that you have an additional advantage over other creditors for that particular asset on which the UCC was made. However, you want to check that your customers aren’t already wound up in a UCC on that particular asset. It's usually the Secretary of State that records the UCC, but in some states you may have to file with the county recorder. Laws vary slightly from state to state, so speak with your attorney before wrapping yourself up in a UCC filing or security agreement. Please contact us for more information about UCC filings and small business laws.