Pledging something of value as a form of collateral to borrow money is creating a debt. Using debt is an instrument of industry. There is nothing dishonorable about acquiring an obligation if the proper planning and execution of that plan are done well.
There came a time when lenders decided there had to be some universal rules regarding how debt is administered. They figured out it would be a problem if someone used their collateral one day to borrow money and then turned around the next day and used the exact same collateral to borrow more.
Over time the universal rules became codified into what is now called the Uniform Commercial Code or UCC for short. It basically has two purposes;
1. The UCC is a gatekeeper giving all lenders notice that specific collateral has been pledged for a loan. Any other lender will see whether a company has used any portion of their business assets as the security for a loan. The new lender can then decide whether they want to move forward with another loan, knowing a lender will be paid off before them in order of date of filing.
2. The UCC instructs the court in case of a liquidation bankruptcy who has priority as a secured party to the remaining assets which are being liquidated. Hypothetically, a secured lender in first position on a UCC filing will be paid in full before any other creditor gets paid.
What does this mean to you?
Fundamentally you must know your UCC status at all times. Surprisingly few business owners know what the UCC is and who might have filed one against their company. You should be asking in any situation where credit is being issued how the lender is going to process it with regards to the UCC. They are called financing statements and they are registered at the Dept of Taxation in the State where the company is registered.
Because of the gatekeeper nature of the UCC, knowing if someone or someone’s are blocking the gate is a handy piece of knowledge. It’s as important as knowing your personal FICO score. For example, you may have an active UCC filed by a lender for a loan you paid off years ago. Having it removed requires you to contact that lender to have it terminated.
In many States you can look up your status at your State.gov website under the business section.