What is a Blanket Lien and What Does it Mean for Your Business?
As a business owner, you may have heard of the term “lien” before, but you might not clearly understand what a lien is or how it can affect your business. Don’t worry—there are lots of small business owners in the same boat. But a lien can have serious implications for your small business, so now’s the time to cover everything there is to know about blanket liens.
When it comes to specific kinds of liens, the blanket lien can be the most dubious. We’ll cover some important facts about liens in general—and blanket liens specifically—to help you make better decisions when it comes to small business funding.
What is a Lien?
First off, what is a lien?
Liens are legal claims written into the fine print of small business loans. They help protect lenders by providing some security in the event a borrower defaults and can’t repay them. When lenders file liens for unpaid debts, they are able to sell a business’s assets in order to collect money. This gives the lender some protection against risk.
You shouldn’t avoid a loan simply because its terms include a lien option. After all, lenders and borrowers both need some reassurances and a lien gives the lender some form of safety net. However, it’s common for liens to be treated like the ugly stepchild, while more common terms like interest rates, due dates, and other repayment terms are trotted out and put on prominent display.
If you’re not careful, you may find out the hard way that a particularly troublesome lien is attached to your loan. Understanding liens can prevent major hassles and save you money in the long run.
How do Liens Work?
When a lender files a lien against your business, it’s essentially an official notice that they are asserting their ability to acquire assets or collateral in the event of your default. If you have multiple loans, you are likely to be subject to multiple liens on multiple or all of your assets.
In the case of multiple liens, there are different lien positions. First, second, third, and so on. The liens are filed in order so that if you default on your loan, the first lienholder gets paid first, the second gets paid next, followed by the third.
For lenders, the risk of lending money to borrowers becomes greater and greater the lower they are on the totem pole. All lenders want to be in the first lien position, and first in line to act upon that lien just in case you can’t repay any of your creditors. And if it’s not possible for a lender to be in first or second position, you could be rejected for a loan or receive quotes for higher interest rates.
What is a Blanket Lien?
Now for the real question on hand—what specifically is a blanket lien?
Blanket liens are important for business owners to understand because they give lenders the right to seize almost every kind of asset and collateral the borrower owns in order to pay off the debt. We’re talking commercial real estate, expensive equipment, intangible assets, or personal assets. This is unlike the conditions of most liens. For instance, if you took out a loan for the specific purpose of purchasing a piece of equipment, a lien would be put on that piece of equipment only. And if you stop paying your equipment loan payments, the lender has the right to seize only the piece of equipment to recoup their losses. If you take out a business loan with a blanket lien, the lender can seize all of your business and personal assets if you stop repaying your loan.
They are generally a one-sided solution to default, providing much more security for lenders than borrowers. In the worst cases, borrowers could lose almost everything of value to them if they default on a loan that was secured by a blanket lien.
So when it comes to blanket liens, know this: A blanket lien provides maximum protection to a lender, and minimum protection to a borrower.
How Do Blanket Liens Affect Your Business?
The obvious answer is this: Liens can cost a lot when you’re already in a tough financial spot.
If you are subject to a blanket lien, it’s entirely possible that you could lose everything if you default on a loan. The consequences can be dire for your business if a blanket lien allows your lender to seize everything and the blanket lien is in a first lien position.
When money is tight, it’s conceivable that you may need to acquire funds from two different lenders, both insisting on being the first lienholder. If neither is willing to accept a second position, you might not get the funds you need. The chances you might be denied a second loan increase even more if that first lien is also a blanket lien—if you lose everything to the first lienholder, then the second lienholder will have nothing to recoup for their losses.
What Can You Do to Protect Your Business?
It’s important to educate yourself about liens before you sign on the dotted line. Here are a few more things you can do to protect your business and ensure you’re getting the best loan terms possible:
- Routinely check for liens filed against your business. You can do the search yourself through your state’s Secretary of State office, or you can hire someone to do a lien search for you. If you know which of your business assets are already held by liens, you’ll be more informed when you’re considering taking on a loan that puts another lien against your business.
- If you find a lien filed against your business, make sure it complies with the conditions of your loan agreement. Whether by mistake or intentionally, some lenders file liens that are broader than you originally agreed to.
- Make sure old liens have been terminated. In some circumstances liens that have been paid off for months or years are still on file. And if you don’t remove old liens from your file, a potential small business lender might reject your business loan application without knowing the actual circumstances of your business.
- Remember that suppliers and franchisors can also file liens against your business and that these may affect your ability to secure loans at competitive rates.
The more you know about liens, blanket liens, and loan terms, the better prepared you’ll be to make sound financial decisions for your business.
When it comes down to it, the dangers of blanket liens should also be a reminder of the dangers of ignoring the fine print! Before you sign on the dotted line for any small business loan, it’s crucial that you fully assess the fine print. You never know if a blanket lien or extra fee will be slipped in a loan agreement. And if that fine print holds a condition that will hurt your business in the long-run, you should be fully aware of the loan agreement before you sign up.
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