What is a UCC Filing?

UCC-1 Financing Statements (“UCC-1” are often referred to as a “UCC” or “UCC filing”) provides public notification of a creditor’s interest in a debtor’s personal property. A UCC filing is a public notice filed under the Uniform Commercial Code (UCC) laws of the applicable jurisdiction and is common practice in lending relationships with debtors. Note that people may use the term “UCC” to refer to both the Code as well as the UCC-1 Financing Statement.

A UCC provides notice to interested parties that an entity or person has a security interest in a debtor's personal property. The Uniform Commercial Code is a set of laws that govern business transactions. The UCC ensures a consistent legal environment and clear guidance for businesses that operate in the United States, including across state lines. While the UCC isn’t federal law, the Code has been adopted by all 50 states. 

How does a creditor or lender file a UCC?

In order for a creditor to enforce its rights against the debtor’s personal property, the creditor must have a perfected security interest. To be perfected, the creditor must satisfy certain requirements as set out in the UCC including  filing a UCC-1 in the appropriate filing office. Once a security interest is perfected, the creditor or funding partner, who is lending or advancing capital, is considered a secured party and has protection in the event the debtor encounters financial difficulties that make it difficult or impossible to pay the secured party or goes bankrupt.  In the event the debtor goes bankrupt, the secured party has a “place in line” when a court divides the debtor’s assets among creditors. A secured creditor stands towards the front of the line and has a higher chance of recovering all or a portion of the debtors money or assets. If a creditor has not filed a UCC-1, they are considered unsecured and will be behind the secured creditors.

Why do UCC-1 filings matter for your e-commerce brand?

The UCC is a set of laws concerning commercial transactions such as the sale of goods, as well as secured financial transactions. UCC-1 filings are often called financing statements, since they declare a financing counterparty’s  security interest in a debtor’s assets. If you secure funding for working capital, and plan to use your assets as collateral, your funding partner will typically file a UCC-1. UCC filings effectively make the funding party “first in line” for proceeds in the event that a business defaults. For these reasons, UCC filings can sometimes limit the options a business has to access funding in the future.

For example, say an ecommerce brand sells housewares and furniture online. It borrows from a local bank, and that bank files a UCC-1 on the brand’s inventory. Depending on the circumstances, financing partners will use floating liens or blanket liens, which provides them a claim on either a portion or category or ALL of a company’s  assets. With limited credit history and few or no other assets to pledge, the business may not be able to access additional options for working capital. Floating liens can even justify delivery stoppages from suppliers in the event that a business does not pay. 

How do you know if you have a UCC-1? 

UCC filings are typically managed by offices of the Secretary of State where the business (the borrower) is registered. There are online databases available from the Secretary of State in your jurisdiction for business owners to search and retrieve UCC filings.  A UCC-1 filing lasts 5 years, even if the loan stretches beyond that. After this time, the outstanding balance is generally considered unsecured; lenders can continue the UCC-1 past the 5 year mark if they renew it within 6 months before the expiration. 

Can my company get Clearco funding if a UCC is filed against it?

Fortunately, brands with UCC’s filed against them can still access Clearco funding.  In fact, Clearco prides itself on regularly working with customers who have existing UCCs and the lenders who file them. Whereas existing UCCs might scare off other funding partners, Clearco has the willingness, creativity and know-how to fund alongside traditional secured lenders who file UCCs. But there are other reasons to take UCC filings into account when planning growth for your ecommerce brand.

Do all funding options involve UCCs?

No, UCC filings are used in secured debt transactions, typically business loans (think of a loan from your local bank). UCCs are intended to protect the lender’s interest in an asset like equipment or machinery, and thereby improve the lender’s chance of recovery if the business defaults on its loan agreement. 

How should an ecommerce brand navigate UCCs with financial partners?

In short, to determine the best funding solution for your brand, do your research on your funding, financing, loan, or other financial partners. If you use business assets as collateral for your funds, there will likely be a UCC-1 filing. Brands should negotiate funding terms with this in mind in order to select the best fit for the needs of their ecommerce business.