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So your lender asked you to sign a UCC lien subordination agreement. What does that mean and should you do it? I know, legal stuff can be confusing. Let’s break it down into simple terms.
A UCC lien is a legal claim on assets a business owns. It allows the lender to seize those assets if the loan goes unpaid. Pretty standard collateral for a business loan.
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Subordination means the lender’s claim gets pushed lower in priority. So if other lenders also have liens, they get paid first if the business defaults. Not so good for the subordinated lender.
Now why would a lender want you to subordinate their lien? Usually it’s because you need another loan and the new lender demanded it. They don’t want to stand in line behind your existing lender if things go south.
Before agreeing to subordinate an existing lien, have a frank talk with your lender:
You’ll also want assurances from the new lender:
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Instead of subordinating a lender’s claim, see if one of these options works:
Subordination agreements must follow state laws like the Uniform Commercial Code (UCC). The UCC governs security interests in personal property and fixtures. All 50 states have adopted articles of the UCC but may have minor differences.
Key issues regulated by UCC Article 9:
The UCC also outlines formal requirements for subordination agreements in Section 9-339. Like they must be authenticated and indicate the order of priority.
Before signing a subordination pact, review it carefully and make sure it addresses these areas:
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The agreement should also address what happens if you refinance any of the loans later down the road. Can those new lenders retain the same priority?
Despite detailed contracts, disputes over subordinated liens still occur. Common reasons include:
Sometimes lenders intentionally exploit ambiguities in the agreement. Other times there are innocent misunderstandings about enforcement.
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To resolve disputes, parties can:
Judges often rule based on the clear intent spelled out in the agreement. That’s why it’s critical to negotiate detailed terms upfront before signing.
While subordinating a lien has risks, it might be necessary to grow your business. Just educate yourself on the pros and cons, negotiate strong contract terms, explore alternatives, and consult attorneys when needed.
With reasonable precautions, UCC lien subordination can be an acceptable price for getting that extra capital injection.
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