Invoice Factoring and the Uniform Commercial Code
Table of contents
- Invoice Factoring and the Uniform Commercial Code
- Uniform Commercial Code (UCC) Filing in Factoring Summary
- What is the Universal Commercial Code or UCC?
- Article 9 of the Uniform Commercial Code (UCC) and Its Relevance to Invoice Factoring
- What does UCC stand for?
- What is a UCC financing statement?
- What is the purpose of a UCC filing?
- UCC-1 filing versus NOA Letter
- What transactions are subject to UCC?
- What are the benefits of a UCC filing in factor financing?
- What do business owners need to know about UCC filings?
- Bankers Factoring UCC Factoring Services
- Ready for the owner-employees of Bankers Factoring to help you grow your company with our invoice funding, including bad debt protection? Use our fast online factoring application or call the toll-free number 866-598-4295
Uniform Commercial Code (UCC) Filing in Factoring Summary
Factoring companies file UCC-1 financing statements to protect their interests and provide solutions for the factor and its clients. UCC filings place liens on a specific asset or blanket liens on all business assets for factoring agreements. The lien reveals the factoring company’s claim to assets in the event of default. Accordingly, the UCC rules and regulations ensure the constant enforcement of contracts in commercial transactions throughout the United States. The UCC instills trust in businesses having interstate deal, exchanging, trading, and getting goods. Your company’s business credit report will often show your company’s UCC filings by lenders by each state’s secretary of state. Lenders use a UCC 1 financing statement to show their filing and the encumbered assets. You file this at the secretary of state’s office in the state where you are incorporated.
What is the Universal Commercial Code or UCC?
The Uniform Commercial Code (UCC) is a comprehensive set of laws designed to standardize and regulate commercial transactions across the United States. Established in the mid-20th century, the UCC aims to facilitate commerce by providing a consistent legal framework for businesses engaging in transactions involving goods, leases, negotiable instruments, bank deposits, letters of credit, and secured transactions.
The UCC is divided into several articles, each addressing specific aspects of commercial law:
1. Article 1: General Provisions – Establishes definitions and principles applicable to the entire Code.
2. Article 2: Sales – Governs the sale of goods, outlining the rights and obligations of buyers and sellers.
3. Article 2A: Leases—This article addresses the leasing of goods and details the responsibilities of lessors and lessees.
4. Article 3: Negotiable Instruments – Covers promissory notes, checks, and drafts.
5. Article 4: Bank Deposits and Collections – Regulates bank transactions, including the duties of banks and their customers.
6. Article 5: Letters of Credit – Governs the use of letters of credit in commercial transactions.
7. Article 6: Bulk Transfers – Provides guidelines for bulk sales of goods.
8. Article 7: Documents of Title – Discusses the handling of documents for goods stored or in transit.
9. Article 8: Investment Securities – Covers transferable securities and related transactions.
10. Article 9: Secured Transactions – Addresses security interests in personal property.
The UCC is not federal legislation; it is adopted at the state level, with all 50 states, the District of Columbia, and the U.S. territories having enacted various portions of the Code. This uniformity is crucial for businesses operating in multiple jurisdictions, as it reduces complexities and ambiguities arising from differing state laws.
Entities engaging in commercial transactions should be familiar with the UCC, as failure to comply with its provisions can lead to legal disputes, financial loss, and damage to business reputation. Understanding the UCC is not merely advisable; it is imperative for sound business practice and strategic planning in today’s complex commercial landscape.
Article 9 of the Uniform Commercial Code (UCC) and Its Relevance to Invoice Factoring
Article 9 of the Uniform Commercial Code (UCC) provides a comprehensive legal framework governing secured transactions, including collateral and security interests. Within this framework, invoice factoring—often referred to as accounts receivable financing—engages specific provisions of Article 9 that merit thorough understanding.
Definition and Scope
Invoice factoring involves selling a business’s accounts receivable to a third party, known as a factor, at a discount. This transaction enables businesses to access immediate cash flow rather than waiting for customer payments. Article 9 governs these transactions by outlining how to create, perfect, and prioritize security interests.
Creation of a Security Interest
Under UCC § 9-203, a security interest in accounts receivable (invoices) can be established through an agreement between the debtor (the seller of the invoices) and the secured party (the factor). This agreement must be effective and demonstrate intent to create a security interest, typically achieved through a written contract.
Perfection of Security Interest
Perfection must occur to effectively secure the factor’s interest, as outlined in UCC § 9-308. Filing a financing statement with the appropriate state authority (secretary of state) or taking possession of the collateral achieves this perfection. This step is critical, as it publicly notifies other creditors of the factor’s rights and helps establish priority over competing claims. As mentioned before, this filing is done in each secretary of state of the state where you were incorporated.
Priority and Enforcement
Article 9 also delineates rules regarding priority of claims. As per UCC § 9-322, a perfected security interest generally takes precedence over unperfected interests. This implies that the factor must act promptly to perfect its interest in the sold invoices to mitigate risks associated with other potential creditors.
UCC § 9-609 empowers the factor to take possession of collateral after default, ensuring protection of its interests during the seller’s insolvency.
Understanding Article 9 of the UCC is essential for any business engaged in invoice factoring. It provides clarity on the creation and perfection of security interests, guiding businesses in managing cash flow while minimizing legal risks. Companies looking to leverage their accounts receivable as a financial tool must adhere to the provisions of Article 9 to ensure they operate within a sound legal framework, ultimately safeguarding their financial interests.
What does UCC stand for?
The Uniform Commercial Code (UCC) is a set of laws governing commercial transactions, such as the sale and purchase of goods and assets, in the United States (US). UCC laws are not federal legislation; instead, they are generally accepted by companies and courts. Acceptance of the UCC gives businesses the confidence that their contracts will be enforced the same way by US courts.
What is a UCC financing statement?
The UCC-1 filing, also called a UCC financing statement, is a legal document letting a lender to publicly declare a lien or secured interest in a company’s asset. In addition, filing the UCC financing statement states that the factoring company has an interest in their client’s assets. The financing statement is a lien the factor places on its client’s businesses, demonstrating its interest in accounts receivable (A/R).
Keep reading and Sell Your Invoices to The Best Factoring Company.
What is the purpose of a UCC filing?
UCC filings are a notice that factoring companies use to secure their claim against client assets in the sale agreement. The purpose is to protect the buyer and seller’s interest in the commercial financing transaction. UCC-1 filings can include one piece of collateral or a blanket lien on all assets.
The type of liens depends on your lender. Some factoring companies only place liens on receivables. At the same time, some factors may place blanket liens on your assets to protect their interests from default.
If you have an SBA loan, typically a blanket lien on all your assets, Bankers Factoring can still fund you with a subordination agreement with your SBA lender. We can even fund you with the IRS placing a lien on your Assets.
The UCC-1 filing established the factoring company and its client’s relationship with the Secretary of State. In addition, the Notice of Assignment (NOA) letter established the factoring company’s relationship with its client’s customers (account debtors).
Keep reading our full article, What is Notice of Assignment in Factoring?
UCC-1 filing versus NOA Letter
The UCC financing statement and NOA letter are documents covered under UCC laws. However, the UCC-1 filing protects the factoring agreement between the factoring company and its clients. In contrast, the NOA letter informs customers of your factoring service relationship.
| UCC-1 Filing (UCC financing statement) | Notice of Assignment (NOA) Letter |
| Factoring Company claim to personal property | Establishes factoring company control and management of receivables with account debtor |
| Places lien on receivables and/or other assets | Covered under UCC laws |
| Establishes record of what lender has right and what you owe | Streamlines receivable and payment process |
What transactions are subject to UCC?
Commercial or business transactions are subject to the rules and regulations under the UCC. Primarily, the UCC governs the sales and transfer of personal property. Most companies conduct interstate trade buying and selling goods, and the UCC standardizes business law in such deals.
Types of commercial transactions covered by UCC:
- Inventory
- Large equipment
- Office equipment
- Real estate
- Vehicles
- Receivables
- Commercial instruments
- Letters of credit
- Investment securities
What are the benefits of a UCC filing in factor financing?
UCC filings provide protection and solution for buyers and sellers. This is an added benefit in factoring agreements for the factoring company and its client. For example, businesses with too many UCC-1 liens may need help to obtain other financing. Additionally, if the factoring company purchased receivables with liens, they would be left to dry. UCC board cover sales of goods, collection, transfers, and secured deals.
Above all, your interstate sale are protected with a standard set of business laws and practices. Businesses can positively enter into new contracts without fear of financial risks.
Keep reading our full article, How Invoice Factoring Works.
What do business owners need to know about UCC filings?
Entrepreneurs and business owners are responsible for active UCC filings with their businesses. As the financing statements placing liens on your assets increase, your ability to secure another capital decreases. Accordingly, you need to understand what warrant your creditor has a secured interest in. Only allow a creditor or factoring company to file a UCC-1 statement if you know the covered assets and termination conditions.
Keep reading the full article, Business Funding Options Available to Companies with SBA Loans.
Bankers Factoring UCC Factoring Services
Invoice factoring is easy for businesses to build credit and improve cash flow. When you factor invoices, there is no negative impact on your credit score, no loan repayments, and flexible capital injection services. Selling your invoices creates a fast receivable cycle, remove the 30, 60, or 90-day wait for payment.
Our team of commercial funding experts is ready to customize a factoring program for your business. Remove cash flow barrier, create regular cash flow, offer bad debt protection, and grow your business by factoring invoices with us.