Many small business owners have heard the word lien before, but do you know how these legal claims can affect your livelihood?
Legally speaking, a lien is a notice attached to a loan that acts as a security interest on a debt owed. Lenders can file a lien for a debt owed by an individual or business so that in the event the borrower cannot meet the contractual obligations of the loan, the lender can sell the borrower’s collateral in order to recoup the loaned amount.
Often buried in the small print of loan paperwork, small business owners may not think that liens are as important as interest rates or repayment terms. However, not the paying enough attention to liens can spell trouble for a small business. By taking the time to understand the liens against a business from the start, small businesses can save time, money and major headaches.
How Liens Work
Say you need a loan for a piece of equipment for your business, or simply working capital. When you take out the loan, the lender may file a lien. This legal claim alerts the business, and all other entities in the state in which the business operates, that the lender will be able to seize some or all of that particular business’s assets in the case of the business defaults on the loan.
All lenders ideally like to be in the first lien position. When a lender is in a first lien position, that lender will be the first to acquire the agreed upon collateral in the event that the business defaults on the loan. Liens are filed in succession, which means that any given time, a business can have multiple liens filed against it. Should a business default on a loan, the lenders with liens are paid out in the order that they have filed the liens against the company.
Lenders who take on second or third lien positions are in a riskier situation than the lender who is in the first lien position. When a lender cannot obtain a first lien position, their loan offering may be more expensive or disappear all together.
Blanket liens are liens that small business owners should be particularly wary of entering into. These liens, most notably offered by short-term lenders or cash advance merchants, give the lender the right to seize all of the debtor’s assets in the event of nonpayment or default. Blanket liens can, in essence, close a company’s doors in the blink of an eye.
What Small Business Owners Can Do
Most importantly, small business owners should be aware of all liens against their business, the succession of the liens and the collateral that is included in all liens. The risk to small business owners come when fine print regarding liens is overlooked or ignored all together.
Because all creditors are legally obligated to file a UCC-1 financing statement when they have a security interest in property of a debtor, it’s relatively easy to check the status of liens against a small business. The Secretary of State website associated with the state the business is located allows small business owners to conduct a lien search. To do so, simply type in the Debtor Name using the standard search field. Any UCC-1 forms filed against the debtor will appear.
Small business owners can also opt for a professional, fee-based lien search done by major credit bureaus, local law firms or title companies. These services can range in cost from $95-$125 depending on the agency.
As a small business owner, it’s vital to regularly check the liens that are filed against a company to see if there are any that do not belong or could be renegotiated. In rare instances, lenders may place a lien against a company that is different than what was agreed upon in your loan agreement. A good rule of thumb is to incorporate a lien search into a bi-annual debt review. This way, even if you get caught up in the day-to-day operations of running a business, you are still reminded that keeping up-to-date on liens is a necessity for all successful businesses.