What is Pre-filing?
In a traditional funding cycle, a lender will order lien searches on potential borrowers at the start of a new deal. Based on the results of those searches (and other measures of creditworthiness) the lender decides whether to fund the applicant. If the lender elects to advance funds, the lender will file a UCC Financing Statement to perfect their security interest and secure a priority position to collect should the debtor default. Finally, many lenders then initiate a search to reflect their UCC Financing Statement to verify the filing officer has indexed their document properly and to confirm their priority relative to other creditors.
Some lenders are breaking with tradition, however, by pre-filing UCC Financing Statements. Under Revised Article 9 of the Uniform Commercial Code, secured parties are permitted to file UCC Financing Statements prior to formal execution of the security agreement (pre-file) provided they receive proper authorization from the debtor to do so. This means a lender may file a UCC document before the closing of a deal, and without having yet obtained lien search results that would reveal any competing claims.
Why would a lender choose to pre-file?
In situations where funding seems likely, pre-filing UCC Financing Statements can save a lender both time and money. The traditional search-file-search approach discussed above can be time-consuming and incurs charges for two sets of searches: pre-filing and post-filing. A lender who secures their priority position by pre-filing a UCC Financing Statement can order only a single set of searches that serves as both a pre-funding due diligence effort and a search to reflect.
Note that if a loan does not occur after pre-filing of a UCC Financing Statement, the lender is expected to prepare and file a timely termination statement for its pre-filed UCC.
For an alternate point of view on pre-filed UCC Financing Statements, refer to our previous blog post, A Factor’s Perspective on Pre-Filed UCC Financial Statements by special guest author, Steve Capper of Flexible Funding.