As a small business owner, you may be scratching your head when you hear the term “lien” being tossed around, and you’re not alone in this.
There are many small business owners out there who are unsure of what a blanket lien is!
After all, liens are written legal claims found in the fine print of a business loan, and you’d have to carefully comb through the legalese to spot it.
But when it comes to blanket liens (also known as ABA liens,) what you don’t know could really hurt your small business.
By understanding what blanket liens are, you’ll be able to avoid complicated legal situations and protect your business financially.
Below we’ll introduce liens, explain blanket liens specifically and how to best protect your small business against them.
What is a lien?
Simply put, a lien is a legal claim sometimes buried in the fine print of small business loan agreements whereby a borrower’s asset or assets are made vulnerable.
For example, with equipment financing, there would be a lien filed on the piece of equipment you are financing until your loan is fully repaid.
If you default on your business equipment loan, the lender can seize the equipment and sell it to offset their loss.
What are the types of lien?
There are different types of liens of course, with the most common and easily understood type of lien being a mortgage.
Liens can be created either by court order or by contract, but it’s the contractual blanket liens that business owners need to watch out for when borrowing working capital.
With contractual liens, the borrower offers an asset to serve as collateral to secure a loan.
Liens are usually filed for a single asset, but if you have multiple loans, you will have multiple liens.
What multiple liens means is that there are different lienholders with designated positions.
For instance, the first lienholder must be paid first, the second lienholder second, and so forth.
The problem arises when a blanket lien is filed for a single loan:
What is a blanket lien?
A blanket lien is the scariest lien of all because it can do the most damage to your small business.
A blanket lien, or all business asset (ABA) lien, puts a lien on nearly all, if not all, of your business assets.
That’s right, the lender can seize everything from equipment, intellectual property such as patents, office furniture, real estate, money in savings accounts— you name it.
As you might’ve guessed, a blanket lien for a small business is designed to minimize the risk for the creditor and maximize the borrower’s, tipping the scales hugely in the creditor’s favor.
If a creditor isn’t able to link some kind of lien to a loan, they’re often unwilling to offer credit to borrowers.
While this is a terrifying thought, small business owners shouldn’t shy away from taking out a loan just because liens are included in the contract.
Borrowing to grow your business is essential, and if a lender files a lien against you, just think of it as a big fat notice of the repercussions should you default on the loan.
It’s crucial that you pay attention to the terms and conditions of liens in your small business loans: terms like blanket lien, ABA lien, or all business assets lien should be a red flag you need to keep negotiating.
What will a blanket lien cover?
As mentioned before a blanket lien, or all business asset (ABA) lien, includes all business assets.
It can list all the types of assets and collateral the lender can collect if the borrower defaults on repayment of a loan.
Blanket liens can cover assets the small business owner currently owns and in some cases, even those he or she will acquire at a future date!
What won’t blanket lien cover?
The good news is that a lender can’t touch payroll deposit accounts.
That’s because these accounts are held in trust on behalf of a business’s employees.
So even if a blanket lien is filed against your business, at least you’ll have the funds to keep paying your employees for a while.
How can a blanket lien affect your business?
Defaulting on a business loan could land you in hot water if there is a blanket lien filed against your business.
In the case of a ABA lien (where the lender can seize all your assets) you can potentially lose everything.
If you have an all business assets lien filed against you, but you need another infusion of cash, just know that things can get a little tricky.
The new lender will naturally want to occupy the first lienholder position for the least possible lending risk
By having a blanket lien in first lienholder position, you will have a hard time getting business funding from a new lender.
How can you protect your business?
There are a few steps you can take to protect your company against blanket liens:
1. Regularly perform a UCC Lien Search.
A UCC filing search will reveal any liens filed against your small business, keeping you aware of the legal consequences (and financial repercussions) in case you default on your loan.
To do a UCC lien search, you can check your Secretary of State’s office for info on its Uniform Commercial Code (UCC) filings since each state has a separate site for its UCC filings.
2. Check to make sure the lien filed is in step with the terms of the loan agreement.
Carefully look over the liens filed against your loan for any discrepancies.
Or better yet, hire a lawyer to make sure everything is kosher.
Any errors can result in headaches down the line, and you’ll want to make sure the terms aren’t different than what you originally agreed to.
3. Make sure old liens have been removed.
This is a big one:
You’ll also want to check to make sure that old liens have been terminated.
Keep your agreements accurate and up to date by getting rid of old liens.
This will help avoid legal snarls and unnecessary confusion.
Always scour the fine print to make sure you understand all terms and conditions of a small business loan.
While it’s easy to ignore and gloss over such details, it’s important to be aware of all vulnerabilities.
These days, consumers have a lot more power.
If you’re looking to connect with a lender, you can get started with our easy online form.
DISCLAIMER: This guide offers a general overview to help small business owners avoid the legal issues associated with business financing, but we strongly suggest that you consult with a qualified legal professional if you have a lien filed against you.