Legal Definitions - UCC-1

A UCC-1, which stands for Uniform Commercial Code – Article 9, Form 1, is a standardized legal document filed publicly by a lender to announce that they have a security interest in specific personal property belonging to a borrower. This filing serves as a public notice to other potential creditors that the lender has a claim on those assets if the borrower defaults on their loan. It's a crucial part of securing loans where movable assets, rather than real estate, are used as collateral under the Uniform Commercial Code, a set of laws adopted by most U.S. states.

Here are a few examples illustrating how a UCC-1 is used:

• Securing a Loan with Business Inventory: Imagine a small electronics retailer that needs a loan to purchase new stock for the upcoming holiday season. The bank agrees to provide the loan, but requires the retailer's current and future inventory (televisions, laptops, smartphones, etc.) as collateral. To protect its interest, the bank files a UCC-1 form with the appropriate state office. This public filing alerts any other potential lenders that the bank has a primary claim on that specific inventory if the retailer fails to repay the loan. If the retailer later seeks another loan from a different bank, that second bank would see the UCC-1 filing and know that the inventory is already pledged.

• Using Accounts Receivable as Collateral: Consider a consulting firm that provides services to clients and often waits 30-60 days to receive payment. To manage its cash flow, the firm takes out a line of credit, offering its "accounts receivable"—the money clients owe for services already delivered but not yet paid—as collateral. The lender files a UCC-1 to publicly record its security interest in these future payments. This means if the consulting firm defaults on its line of credit, the lender has a legal right to collect those outstanding client payments directly, up to the amount owed on the loan.

• Financing Agricultural Products: A large commercial farm needs a significant loan to cover the costs of planting, harvesting, and maintaining its livestock. The agricultural lender agrees to the loan, taking a security interest in the farm's current year's crop (e.g., corn and wheat) and its herd of cattle. The lender files a UCC-1 to establish its priority claim on these specific farm products and livestock. This ensures that if the farm encounters financial difficulties and cannot repay the loan, the lender has the legal right to seize and sell the designated crops or cattle to recover its funds, ahead of other unsecured creditors.