The "First Position" Myth: How Loan Stacking Happens

A merchant applies for a $75,000 advance. Your underwriter verifies the business is active in Delaware, reviews three months of bank statements, and approves the deal. You file a UCC-1 financing statement and fund. Two weeks later, collections reveals the merchant already has four outstanding advances from other funders—none of which appeared in your pre-funding search.

This is loan stacking, and it's not an edge case. In alternative lending, the phrase "one signal mix could lead to millions of dollars of loss" captures the reality: a single missed lien can mean the difference between first-position security and standing in line behind four other creditors when the merchant defaults.

The challenge isn't detecting the obvious cases. It's the near-misses—the slight name variations, the filings in unexpected states, the timing gaps between application and funding. This is why integrating automated UCC lien search into your underwriting workflow isn't optional. It's the foundation of portfolio protection.

Why Traditional UCC Searches Fail

UCC searches seem straightforward: query the Secretary of State database by debtor name, review any existing filings. In practice, three failure modes undermine most search strategies.

The name matching problem

UCC Article 9 is unforgiving about debtor names. A filing against "ABC Logistics LLC" doesn't perfect against "ABC Logistics, LLC" (with comma) in some state interpretations. Minor variations that seem obviously the same entity—different punctuation, "Inc." vs. "Incorporated," missing "The" prefix—can produce different search results or invalidate filings entirely.

CSC's UCC search guidance emphasizes the critical importance of name validation against real-time jurisdiction data to avoid filing errors.¹ This is why the workflow matters: you must verify the exact legal name via Secretary of State records before running a UCC search. Search using the name on the application, and you might miss filings against the entity's actual registered name.

The multi-state exposure

A business incorporated in Delaware with principal operations in California might have UCC filings in either state—or both. Most alternative lenders operate nationally, which means your borrowers could have filings in any of 50 states. Searching only the state of incorporation misses filings in the state of operations, and vice versa.

The timing gap

UCC searches show what was filed when you queried. A lender who searches on Monday and funds on Friday might miss a filing from Tuesday. Sophisticated borrowers—and outright fraudsters—exploit this gap by applying to multiple funders simultaneously, knowing the searches will all come back clean.

The Loan Stacking Pattern

Loan stacking occurs when a borrower takes multiple advances against the same collateral, often from different lenders who aren't aware of each other. It's particularly prevalent in merchant cash advances, where underwriting timelines compress to hours rather than weeks.

How widespread is the problem?

According to the LexisNexis 2024 SMB Lending Fraud Study, SMB lending fraud increased by nearly 14% year-over-year, with most lenders anticipating losses between 6% and 10% of portfolio value.² Loan stacking is a primary driver of these losses.

The math is brutal. A merchant with $50,000 in monthly revenue might support one $30,000 advance. Stack four advances totaling $120,000 against that same revenue, and default becomes nearly certain. The first funder to file has priority; everyone else fights over scraps.

Why do borrowers stack?

Some borrowers stack intentionally as fraud. But many stack out of desperation—using proceeds from advance #2 to make payments on advance #1, then advance #3 to cover #2, until the structure collapses. The New York Attorney General's $1 billion+ judgment against Yellowstone Capital exposed how aggressive collection practices and high-cost advances create conditions where stacking becomes almost inevitable for struggling merchants.³

Step 1: Verify the Exact Legal Name First

Before you search for UCC filings, you need the debtor's exact legal name as registered with the Secretary of State. This isn't optional—it's the foundation of an enforceable filing.

Why exact names matter

UCC Article 9 requires "sufficient" debtor name identification, but state-by-state implementation varies. Filing against a trade name when the legal name differs? Potentially unenforceable. Using "John Smith Inc" when the registered name is "John Smith, Incorporated"? Potentially insufficient.

The National Association of Secretaries of State maintains guidance on UCC filing requirements, emphasizing that financing statements must use the debtor's name as shown on the public organic record—for registered organizations, that means the exact name from the state registration.⁴

The verification workflow

Step 1: Receive application with business name, state of formation, and state of operations

Step 2: Query Secretary of State for exact registered name, current status, and filing date

Step 3: Confirm entity is Active/Good Standing (not Dissolved, Suspended, or Administratively Dissolved)

Step 4: Capture exact legal name including punctuation, suffixes, and spacing

Step 5: Use verified legal name for UCC search

Step 6: Use same verified legal name when filing your UCC-1

Skipping step 2-4 creates compounding problems. Your search might miss existing filings because you're searching the wrong name. Your filing might be unperfected because you filed against the wrong name. Either failure can cost you first-position priority.

Step 2: Search UCC Filings Strategically

With verified legal name in hand, you can search for existing liens. But "search" isn't a single action—it's a strategic decision about which states, which name variations, and which lien types to include.

Which states to search?

At minimum, search both the state of formation and the state of principal operations. For Delaware-incorporated businesses operating in Texas, that's two searches. For businesses with locations in multiple states, expand accordingly.

Current UCC coverage through Cobalt includes 11 states with more in development. For states not yet covered via API, consider whether the risk profile justifies manual search or third-party service.

Fuzzy matching vs. exact matching

Strict exact-match searches miss filings with minor name variations. Too-loose fuzzy matching returns irrelevant results that slow review. The optimal approach combines:

• Exact match on verified legal name: The primary search • Suffix variations: LLC, L.L.C., Limited Liability Company • Punctuation variations: With and without commas, periods, apostrophes • Similar name review: Catch filings that might be the same entity with typos

For sophisticated fuzzy matching strategies that balance coverage against noise, see our technical guide on detecting fake business entities which covers name normalization techniques.

Interpreting search results

UCC search results require analysis, not just pass/fail assessment. Key fields to review:

• Filing date: When was this lien perfected? Earlier filings have priority. • Collateral description: "All assets" blanket liens vs. specific equipment/inventory liens • Secured party: Who holds the lien? Cross-reference against known lenders. • Amendments and continuations: Has the filing been modified or extended? • Termination status: Some states show terminated filings for up to a year

According to CLAS's guide on interpreting UCC search results, priority is determined by filing order—a first-position lien has priority over subsequent liens against the same collateral, assuming proper filing under UCC Article 9 rules.⁵

A filing from a senior lender against specific equipment doesn't block your blanket lien on receivables. But a blanket lien from another alternative funder? That's a red flag requiring conversation before proceeding.

Step 3: Integrate with Entity Verification

UCC searches become dramatically more powerful when integrated with Secretary of State verification. The combination catches fraud patterns that neither alone would detect.

Cross-referencing for fraud signals

Signal 1: Time in business mismatch Application states "5 years in business." SOS record shows formation date from 5 months ago. This is either a mistake or fraud—either way, it demands resolution before funding.

Signal 2: Recent blanket lien + clean application Application claims no existing debt. UCC search shows blanket lien filed 30 days ago. The applicant either forgot (concerning) or lied (disqualifying).

Signal 3: Administrative dissolution + active UCC filings Entity shows "Dissolved" in SOS records but has active UCC filings. The business may be operating without legal authority, or the filings may be against a defunct entity. Either way, proceed with caution.

Signal 4: Name discrepancy between SOS and application Application uses trade name. SOS shows different legal name. Existing UCC filings are against the legal name. Your search by trade name missed them entirely.

The integrated workflow

Pre-screening (automated):

Query SOS for entity status and exact name
If Dissolved/Suspended → auto-reject or escalate
If Active → proceed with verified name

Due diligence (automated):

Run UCC search using verified legal name
Flag applications with existing blanket liens
Flag applications with multiple recent filings (stacking indicator)

Decision support (human review):

Review flagged applications with full context
Cross-reference lien holders against known stacking networks
Make funding decision with complete picture

The Portfolio Protection Impact

Automated UCC integration doesn't just catch fraud on new applications. It enables portfolio monitoring that catches deterioration before losses materialize.

Pre-funding protection

Catching loan stacking before funding is the highest-value application. If a UCC search reveals four existing blanket liens, you don't fund—avoiding potential total loss.

Portfolio monitoring

Running periodic UCC searches against funded accounts catches new liens filed after your funding. If a borrower you funded in January shows three new filings by March, that's an early warning of stacking behavior and potential default.

Collection positioning

When defaults occur, having accurate, current UCC data accelerates collection. Knowing your exact priority position relative to other creditors informs strategy—pursue aggressively if you're first position, negotiate settlements if you're fifth.

Technical Implementation

Cobalt's UCC coverage currently spans 11 states, with expansion ongoing. For covered states, the workflow integrates directly with entity verification.

API workflow

Request: Business name + state Response: SOS verification data + UCC lien results Output: Combined risk assessment with entity status and lien history

Handling name variations

The API supports fuzzy matching with confidence scores. Set thresholds appropriate to your risk tolerance:

• ≥0.90: High-confidence match—treat as the same entity • 0.75-0.89: Probable match—review manually • <0.75: Unlikely match—probably different entity

Async architecture for slow states

Some state databases respond slowly. The async architecture (RetryID polling or callbackUrl webhooks) handles variable response times without blocking your application pipeline.

From Lien Detection to Compliance Documentation

Detecting existing liens is only half the battle. You also need documentation proving you conducted appropriate due diligence—documentation that holds up in audits and, if necessary, litigation.

For detailed guidance on creating audit-ready compliance trails with timestamped screenshots and source documentation, see our guide on visual proof for compliance audits.

Start Protecting Your Portfolio

Every day you fund without comprehensive UCC integration is a day you're exposed to loan stacking losses. The merchants who apply to multiple funders simultaneously are counting on speed beating diligence. Don't let them be right.

Cobalt's API integrates entity verification with UCC lien searches in a single workflow. Verify the legal name, check for existing liens, and make funding decisions with complete information—in seconds, not hours.

See how Cobalt automates this →