What is a UCC-1 filing and why does a factor need one?
A UCC-1 financing statement is a public notice that a creditor or buyer has an interest in a company’s assets. Under UCC Article 9, the sale of accounts receivable is treated much like a secured transaction for filing purposes, so a factor files a UCC-1 to perfect its ownership of the invoices it buys and to establish priority against later claimants.
The filing is usually made with the secretary of state in the state where your business entity is organized, not where it operates. A Delaware LLC doing business in Florida gets filed in Delaware. A financing statement generally stays effective for five years and can be extended with a continuation filed in the six months before it lapses.
What is a blanket lien, and why does it block factoring?
A blanket lien is a UCC filing that covers all or substantially all of a business’s assets, typically described as all assets or a long list that includes accounts, inventory, equipment and general intangibles. Banks, SBA lenders, equipment lenders and many merchant cash advance providers file them.
The problem is that accounts receivable are included. If a lender already has a perfected first-position claim on your receivables, a factor can’t buy those invoices free and clear. The earlier filing generally wins. Until that conflict is resolved, a reputable factor won’t fund.
MCA filings are a common surprise. Many owners don’t realize their advance came with a UCC-1 on all assets. If that’s you, see MCA refinancing.
How do factors run lien searches?
Before funding, the factor orders a UCC search against your exact legal entity name in the state of organization, and often in the state where you operate. Many also search federal and state tax liens, judgments and pending litigation.
Exact name matters. Searches are run on the legal name on your formation documents, and a filing under a slightly different name may or may not be found depending on the state’s search logic. Pull your own search before applying so nothing surprises you in underwriting.
| Filing found | What it means | Typical resolution |
|---|---|---|
| Bank blanket lien | Bank has priority on receivables | Intercreditor or payoff |
| SBA 7(a) or 504 lender lien | Lender may hold first position on all assets | Subordination of receivables, if the lender agrees |
| Equipment lender (specific collateral) | Covers only listed equipment | Often no action needed |
| MCA provider lien | Often all assets, including receivables | Payoff and UCC-3 at closing |
| Prior factor | Factor owns or claims receivables | Buyout with payoff letter |
| Stale lien, loan already paid | Never terminated | Request UCC-3 from secured party |
| Federal or state tax lien | Government claim on property | Payment plan, subordination or payoff |
What is an intercreditor or subordination agreement?
An intercreditor agreement is a contract between two creditors that sets out who gets paid from which assets and in what order. In factoring, it usually says the bank or SBA lender releases or subordinates its interest in receivables to the factor, while keeping first position on equipment, real estate and everything else.
A simpler version is a subordination agreement or lien carve-out, where the existing lender agrees its lien does not reach the factored accounts. Either way, the factor needs it signed before funding. Expect the agreement to address what happens to receivable proceeds, notice requirements if either party enforces, and whether the existing lender can block new borrowing.
Your bank has no obligation to sign. Many will when the alternative is the borrower missing payroll or defaulting on the loan, but timing and appetite vary lender by lender.
Will my SBA lender subordinate to a factor?
Some will, some won’t. SBA 7(a) and 504 lenders typically take a blanket lien, and SBA rules give lenders room to subordinate certain collateral when it supports the borrower’s working capital and protects repayment. Whether a specific lender agrees depends on its credit policy, the loan’s performance and how the request is presented.
The pitch that tends to work: the factor takes only receivables, the business gets steady working capital, and the SBA loan is more likely to be repaid. A clear payoff waterfall and a capped facility size help. Read factoring with an SBA loan and factoring vs. SBA loan for the full picture.
How do factors handle IRS tax liens?
A federal tax lien arises when a business owes assessed federal tax and doesn’t pay after demand. Once the IRS files a notice of federal tax lien, it can reach the business’s property, including receivables, and it complicates any factoring deal. Unpaid payroll taxes are the most common cause.
Federal tax law includes limited protections for certain commercial financing secured by receivables, but those rules are technical and most factors won’t rely on them alone. More often, a factor will ask for one of the following: proof of an IRS installment agreement in good standing, a certificate of subordination of the federal tax lien (requested from the IRS using Form 14134), or a payoff from the first advances.
State tax liens and unemployment tax liens work differently by state. Disclose every tax issue up front. A tax lien that surfaces in underwriting after you said there were none ends more deals than the lien itself.
What is a UCC-3 termination and when do I need one?
A UCC-3 is the form used to amend, continue or terminate a UCC-1. When a lender is paid off or a factor relationship ends, the secured party should file a UCC-3 termination so the public record shows the lien is released.
Lenders don’t always file them. Old liens from loans paid off years ago are one of the most common reasons a factoring closing slips a week. If you find one, ask the original lender for a termination. If they’re unresponsive, Article 9 gives debtors a process to demand one, and your attorney can help. When you switch factors, the payoff letter should commit the old factor to file a UCC-3 after payment. See factor buyout.
Step by step
- Pull your own UCC searchSearch your exact legal name in your state of organization and note every secured party and collateral description.
- Sort filings by impactSeparate liens that touch receivables from those limited to equipment or vehicles.
- Clear stale filingsAsk lenders on paid-off loans to file UCC-3 terminations now, before underwriting starts.
- Open the conversation with your bank or SBA lenderExplain the factoring plan, share the proposed facility size and ask what they need to sign a subordination.
- Address tax liensGather installment agreements or start a subordination request so the factor sees a path.
- Close with payoff lettersAny lender or MCA being paid off at closing should provide a payoff letter that commits to a UCC-3.
Questions people ask
Does a factor’s UCC-1 hurt my ability to get a bank loan?
It can, because a bank searching your records will see that receivables are already sold or pledged. Many businesses use factoring as a bridge and then refinance into a bank line once financials improve. At that point the factor is paid off and files a UCC-3.
Can a factor file a UCC-1 on all my assets?
Some do, using a broad collateral description even though they mainly rely on receivables. Ask the factor to limit the filing to accounts and related rights if you have other lenders or plan to borrow against equipment. Many will agree.
How long does it take to get a bank to sign an intercreditor?
Anywhere from a few days to several weeks. Community banks that know the borrower can move quickly, while larger banks and SBA lenders may route it through credit committee. Starting the conversation early is the best way to shorten it.
Can I factor if I have an IRS tax lien?
Often yes, but the lien must be addressed. Factors typically want an installment agreement in good standing, a subordination from the IRS, or a plan to pay it from early advances. Disclosure up front matters.
What if my MCA lender filed a UCC-1?
The MCA provider usually has to be paid off or agree to release receivables before a factor can fund. Many factoring closings pay off MCA balances directly from the first advance and obtain a UCC-3 in return.
Do I need a lawyer for an intercreditor agreement?
It is wise to have counsel review it, especially if it restricts future borrowing or sets default triggers. The factor and bank usually draft it, but the terms affect your business. Nothing here is legal advice.
What is lien priority?
Lien priority is the order in which creditors are paid from the same collateral. Under Article 9 it generally follows the order of filing or perfection, unless the creditors agree otherwise in an intercreditor or subordination agreement.