Understanding UCC Lien Filings and Personal Guarantees

An unsecured business loan is an alternative to the common loan practice of pledging personal or business collateral to one’s loan. It allows a borrower to take out a loan without offering collateral such as your house or business inventory. However, it is common for lenders to require some type of backing to take out a loan, usually in the form of a UCC filing or personal guarantee. On this page, we’ll break down the differences between an unsecured versus secured loan and define what a UCC filing or personal guarantee is, so you can make an informed decision when applying for a loan.

What is an unsecured business loan?

An unsecured business loan is a loan type not backed by collateral, like property, equipment, inventory – or even personal collateral such as your house or car. This loan type allows you to secure funding for your business if your business doesn’t have physical assets or if you don’t want to provide any personal assets. However, many lenders still require some kind of backing to secure a loan to reduce risk.

What’s the difference between an unsecured vs. secured loan?

A secured loan offers collateral for the loan. The loan may be secured by a specific piece of collateral, such as a car, truck, or piece of real property. The loan may also be secured by the “general intangibles” of the business, which would include the business’s inventory and accounts receivables. This means if the loan defaults, the lender can look to the assets securing the loan to pay for the amount due under the loan. In contrast, an unsecured loan is not secured by any assets, even the general assets of the business. When a commercial loan is unsecured, the lender will typically require a personal guarantee or UCC filing on the loan to minimize risk to the lender.

What is a UCC filing?

UCC stands for “Uniform Commercial Code” and refers to a set of laws intended for nationwide coverage – i.e., a set of similar laws across the United States to govern sales and other commercial transactions. A UCC filing is a legal form indicating a lender has a security interest in the personal or business property of a debtor. It protects the interests of the lender by decreasing the risks associated with granting a loan.

It is common to see a blanket UCC lien on a loan agreement, which secures an interest in all of the borrower’s assets if the borrower defaults on the loan. The UCC lien gives notice that if the debt is not repaid, then the lender has the right to the borrower’s assets to offset any loss the lender incurred as a result of the borrower’s failure to pay.

What can a UCC filing be placed on?

A UCC filing can be placed on many things but is commonly placed on property or other business assets. It is generally not placed on titled assets, such as a vehicle or real property, like a home or commercial building.

What is a personal guarantee?

Now that we’ve outlined what a UCC filing is, let’s identify the other common aspect of loan agreement. A personal guarantee is a provision on a business loan agreement that states the borrower is personally responsible for the company’s debt in case of default. This helps reduce the risk for a lender when collateral isn’t offered. If your business can’t afford to repay it, then you list yourself as the guarantor to ensure the loan will be repaid. It essentially means the borrower personally guarantees the business’s loan will be repaid in full, plus any interest accrued.

What is the difference between a personal guarantee and UCC filing?

Typically, a loan agreement will have both a personal guarantee and UCC filing. Even though you may see both provisions together on an agreement, it’s still important to know the difference between the two and how it affects you in case you’re unable to repay the loan. Because a personal guarantee really is just that – a guarantee by the individual to repay the loan – the UCC filing often establishes the priority of claims on an agreement by tying the agreement to a specific item, like the equipment mentioned above. UCC filings are public record, so lenders often use a UCC filing to enhance the personal guarantee by having them work in tandem.