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As a business owner, you may have heard the term “lien” before. You might have heard it in the context of “blanket lien,” too. But you might not clearly understand what a lien is or how it can affect your business. This is the really important part.
Don’t worry, though. There are lots of small business owners in the same boat. Since a lien can have serious implications for your small business, now’s the time to learn everything about about blanket liens. Starting with the definition, all the way through the nuances of their implications.
And while we’re talking about the world of liens, we’ll also cover some important facts about liens in general—plus blanket liens specifically—to help you make better decisions about small business loans.
A blanket lien provides maximum protection to a lender, and minimum protection to a borrower. Blanket liens give lenders the right to seize almost every kind of asset and collateral the borrower owns in order to pay off debt. That includes 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.
We’ll get to more on most liens in a second. But it’s important for business owners to know about blanket liens because they’re generally a one-sided solution to default, providing much more security for lenders than borrowers. In the worst cases, borrowers can lose almost everything of value to them if they default on a loan that secured by a blanket lien.
→Too Long; Didn’t Read (TL;DR): With a blanket lien, a lender has the right to seize essentially any kind of collateral that the borrower has in order to recoup debt, rather than a specific kind of asset.
Now that you have that working definition of a blanket lien, let’s take a step back for a moment and talk in slightly more general terms. A good place to start—let’s define a lien in broad terms.
In the big picture, liens are legal claims written into the fine print of small business loans. Because loan terms are all about helping lenders mitigate their risk, liens help protect lenders. They provide some security in the event a borrower defaults and can’t repay them. When lenders file liens for unpaid debts, they’re able to sell a business’s assets in order to collect money. This gives the lender some protection against the risk that they’re taking when lending that money.
Don’t get spooked by a lien option! You shouldn’t avoid a loan simply because its terms include a one. 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.
→TL;DR: A lien on a small business loan allows a to sell a small business’s assets to collect on unpaid debts in case the borrower defaults on their loan. They’re not terrible! But you should know if you have one.
Unlike blanket liens, which we mentioned above, if your loan has a lien option, it’s often only tied to one asset. That’s the asset that’ll be collected if you’re unable to repay according to the terms agreed to with your lender.
And, often, the collateral is built into the loan itself according to the loan product that you choose. Equipment financing is a good example of this, where the lender can seize the equipment for which they provided funds if you default on your loan, or stop making payments.
When a lender files a lien against your business, it’s essentially an official notice that they’re asserting their ability to acquire assets or collateral in the event of your default. If you have multiple loans, you’re likely to be subject to multiple liens on multiple—or all—of your assets.
Yes! If you have multiple liens, then lenders have 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. You get the idea.
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.
→TL;DR: A lien is usually tied to one type of asset. That said, if you have multiple loans, you might have multiple liens. In which case, your lenders all have different lien positions—which affect your desirability as a loan candidate.
Now that you have an understanding of both liens in general and how they compare to blanket liens, let’s come back to blanket liens. The obvious answer here is that liens of any type can cost a lot when you’re already in a tough financial spot.
But especially if you’re subject to a blanket lien, you could possibly 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.
→TL;DR: Simply, blanket liens can put your entire business at risk if the lender with a blanket lien is in first lien position. If you have a blanket lien and multiple loans, make sure you know which lender has first lien position.
It’s important to educate yourself about liens before you sign the dotted line. Or, if you already have a loan and aren’t quite sure if you have a blanket lien, you can take some action, too. Here are a few more things you can do to protect your business and ensure you’re in the best possible position:
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.
→TL;DR: If you’re looking for a new small business loan, there’s some work you can do in advance of applying for a small business loan to get better terms. And if you have a loan already, there’s work you can do to protect yourself, too.
If nothing else, this should be a reminder of the dangers of ignoring the fine print! Before you sign for any small business loan, read all of your terms. You never know if a blanket lien or extra fee will end up 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.