Personal Guarantees and UCC Liens: What You Are Signing

When you borrow through a company, the company is legally separate from you. That separation protects your personal assets, but it also means the lender can only collect from the business. For newer or smaller companies, there may not be much to collect.

Lenders therefore add protection in two ways. A personal guarantee adds you as someone they can pursue. A UCC lien gives them a claim on business assets. Understanding each helps you negotiate and plan.

A personal guarantee is a signed promise that you will repay the debt if the business does not. It generally comes in two forms:

• Unlimited guarantee: you are responsible for the full amount owed, including interest and collection costs.
• Limited guarantee: your liability is capped at a set dollar amount or percentage.

Practical points to understand:

• It applies even when the borrower is an LLC or corporation.
• It can allow the lender to pursue personal assets, depending on the document and state law. Get legal advice for how it applies to your situation.
• In SBA lending, owners with a meaningful ownership stake are typically required to provide one. See our guide to SBA 7(a) and 504 loans.
• Some alternative lenders add a "bad acts" or limited guarantee that applies only if you commit fraud or divert funds. Read exactly what triggers it.

UCC stands for the Uniform Commercial Code, the set of model laws that govern secured transactions in the United States. When a lender takes a security interest in your business assets, it files a UCC-1 financing statement with your state, usually the Secretary of State. This public record tells other creditors that the lender has a claim on the collateral.

There are two broad kinds:

• Specific lien: covers named assets, such as a particular truck or piece of equipment. This is typical for equipment financing, where the equipment itself secures the loan.
• Blanket lien: covers essentially all of the business's assets, which can include equipment, inventory, accounts receivable and more, including assets acquired later.

A blanket lien does not mean the lender will take everything. It means that if you default, the lender has a legal claim to a wide range of assets. It can also make it harder to get additional financing, because a second lender sees that the assets are already pledged.

Because UCC filings are public, any new lender can search them. A blanket lien from an earlier loan can:

• Reduce the collateral available for a second loan
• Lead a new lender to require the first lender's consent, or to decline
• Complicate a refinance until the old lien is released

This is one reason to know exactly what has been filed against your business. You can search your state's UCC records, or ask a lender to share the filings it finds.

Neither disappears on its own just because you made your final payment. Make a checklist:

1. Get a payoff letter showing a zero balance when the loan is finished.
2. Request a UCC-3 termination statement. Ask the lender to file it, and confirm that it was recorded. In many states, the secured party is required to file a termination after payoff when you request it, but check your state's rules.
3. Ask for a written release of the guarantee, or confirmation that it ended with the debt.
4. Search the public record a few weeks later to verify the lien is gone.

Stale liens are surprisingly common, and they can cause trouble when you apply for new financing years later.

• Is there a personal guarantee? Who must sign, and is it limited?
• Is the lien specific or blanket? What assets does it cover?
• Will you subordinate your lien if I need a second loan?
• How and when will the lien and guarantee be released?
• What happens in a default, step by step?

Terms like these are negotiable more often than owners expect, particularly with a strong profile. They are also easy to overlook in a long agreement. This article is general information, not legal advice. Have an attorney review any agreement that puts personal assets at risk.