A UCC lien is a security interest in business property that has been made public by filing a financing statement under Article 9 of the Uniform Commercial Code. It tells other lenders that a creditor has a claim on certain assets.
How it works in factoring
When a business sells receivables to a factor, Article 9 treats that sale much like a secured loan for purposes of perfection and priority. To protect its ownership against other creditors and a bankruptcy trustee, the factor files a UCC-1 financing statement, usually with the secretary of state where the business is organized.
The filing describes the collateral. A factor's filing might cover only accounts receivable, or it might be a "blanket" description reaching all business assets, such as inventory, equipment and deposit accounts.
Priority among competing creditors generally follows the order of filing or perfection. That is why factors search the UCC records before funding. If a bank or another financier has an earlier lien on receivables, the factor will typically need that creditor to release its claim or sign a subordination or intercreditor agreement.
A filing generally lasts five years unless continued, and it is removed with a UCC-3 termination when the obligation is satisfied.
What to check
- Search your own name in the state UCC database to see existing liens
- Ask the factor what collateral description it will file
- Confirm in writing that a termination will be filed after payoff
- Watch for older liens from loans or advances you have already repaid