First, what is a UCC1? Under the provisions of state Universal Commercial Code (“UCC”) statutes, when personal property (equipment, inventory, and other tangible assets of a business) are used as collateral for borrowing, a UCC-1 statement is prepared and filed. This process is also called “perfecting the security interest” in the property, and this type of loan is a secured loan.
The filing of a UCC1 creates a lien against the property, so the borrower may not dispose of the property without paying off the debt.
Second, why does a lender file a UCC1? The purpose of filing a financing statement is to put subsequent creditors on notice that the debtor’s property is encumbered. The first lender to record a UCC1 lien takes priority, which means the lender is the first entity to be paid if the assets if the business have to be liquidated.