What Is a UCC Filing and How Does It Affect Your Factoring?
Factoring companies file UCC-1 financing statements to secure their interest in your receivables. Here's what that means for your business.
Key Takeaways
- ✓UCC-1 filings are public notices that a factoring company has a security interest in your receivables.
- ✓Most factoring requires a UCC-1 filing—this is normal and not a negative mark.
- ✓Existing UCC liens from other lenders can block factoring approval.
- ✓You can have UCC liens terminated after paying off a prior lender.
- ✓Factoring companies typically file on all your business assets, not just specific invoices.
UCC Basics for Business Owners
The Uniform Commercial Code (UCC) is a set of laws governing commercial transactions across most US states. Article 9 of the UCC governs secured transactions—how lenders and creditors establish a legal claim ('security interest') on your business assets.
When a factoring company buys your receivables, they file a UCC-1 Financing Statement with your state's Secretary of State. This public notice announces: 'This factoring company has a priority claim on this business's receivables.'
This isn't a judgment or lien against you personally—it's simply a public record that creates legal priority if multiple creditors make claims on the same assets.
Why Existing UCCs Can Block Factoring
Here's why checking your UCC history matters before applying for factoring:
If you have an existing SBA loan, bank line of credit, or previous factoring relationship, there may be active UCC-1 filings from those lenders. If another lender's UCC covers 'all assets' or 'all accounts receivable,' they have legal priority over the factoring company.
The factoring company can't take a first-priority security interest in your receivables if another lender is already there. Three options:
1. Subordination agreement: The existing lender agrees in writing to subordinate their UCC claim, giving the factor priority on receivables. Banks sometimes do this.
2. UCC termination: If the prior lender's loan is paid off, you can request they terminate their UCC filing. This clears the way for factoring.
3. Work around: Some factoring companies will fund as a second-priority lienholder, but at less favorable terms.
Before applying for factoring, check your UCC history via your state's Secretary of State website.
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