February 24, 2020

How to Avoid A Blanket Lien: The Bane Of Equipment Financing

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FF

Fora Financial

Staff

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• Business Finances

• Small Business Tips

Blanket liens are a way for lenders to mitigate the risks involved in lending money. They’re a popular option with banks and other creditors, but are they a wise choice for businesses?

What Is A Blanket Lien?

When deciding whether to provide funding for your business, a bank or other entity might ask for collateral, which is an asset that the lender can seize if you’re unable to repay the loan.  A blanket lien is one form of collateral. With this type of lien, you use multiple business assets as collateral to secure funding.  Some of the items listed as collateral might include equipment, vehicles, inventory, and other assets. Depending on the terms of the lien, it may cover both current assets and any others you acquire in the future.  If you agree to a blanket lien, the lender will file a UCC-1 with your state’s Secretary of State. This form confirms that if you don’t repay your loan per your agreement, the lien will go into effect. Typically, most UCC-1 liens last for five years.  Because blanket liens involve multiple significant assets, they can be risky. Be sure you understand the terms completely if you agree to one. 

Can These Be Beneficial For Your Business?

Some types of lien are considered negative. For example, you might experience a federal tax lien if you don’t pay your taxes, because this is a negative reflection of your business. A UCC lien isn't necessarily negative, even though it may appear on your credit report. If you make payments on time, it shouldn’t hurt your personal or business credit.  Think of a UCC blanket lien as one way to get funding if other methods aren’t available to you. Although it can be considered risky, it's also a good way to grow your business. 

Example Of A Blanket Lien Gone Right

Imagine that you need funding to purchase a new piece of equipment. You approach your bank to request funding, and they tell you that because of a poor credit score, you won't qualify. Or, if you do qualify, they offer a loan with a high interest rate. After this, your bank might consider a secured loan with a blanket lien clause. The interest rate is likely to be lower because it’s less risky for the bank.  If you agree to the loan terms, you’ll get the money you need to afford the necessary equipment. As long as you complete your payments on time, everything will go smoothly. Once the loan is paid off, the bank will release the lien on your assets. 

But They Can Also Go Very Wrong

The worst-case scenario arises if you're unable to make your loan payments. The creditor can then claim many or all of your business assets.  Even if you don’t default on your loan, a blanket lien can cause trouble for your business. For example, you might want to sell equipment or inventory, but the terms of the lien can forbid you from selling these items since the lender has a claim to them.  If you need additional funding, lenders might be wary if you already have a lien in place. They know that they would be second in line for your assets if something goes wrong. 

Popularity of Blanket Liens With Lenders

Blanket liens are one of the most common varieties of lien that creditors require.  Many lenders encourage these liens because they’re riskier for the debtor than the lender. If you don’t pay on time, the lender will have access to several of your business assets. As a result, you’re more likely to keep up with your loan payments and avoid defaulting.  It offers a sense of security for lenders. If one asset is unavailable, there are others that the creditor can seize if the business can’t pay.  Lenders know that if you can’t repay your loan, they’ll be protected from losses with this kind of lien. Once they legally seize your assets, they can sell them to cover their costs.  One other reason for the popularity of bank liens is that creditors want to keep your business. If your assets are tied up with a particular bank, you’re likely to return to them for additional services. 

Why Are Blanket Liens Even A Thing?

Generally speaking, a lien is a claim someone has on a business or person’s property. Car loans and mortgages are typical examples. The purpose of a lien is to ensure that if someone lends you money, you’ll pay it back. If you don’t repay it, the lender will have a way to recoup their costs.  Blanket liens are also a popular option for some businesses. They allow banks and other creditors to offer loans that would be too risky otherwise. Because the lien lowers risk for the creditor, they’re able to offer more affordable interest rates. A business might be able to secure a higher funding amount due to a lien mitigating the lender’s risk.  Lenders typically enforce liens as a last resort. If you’re late on one payment, it’s unlikely that the creditor will begin the process to seize assets. However, if you’re not sure you’ll be able to pay back the loan, be careful; a blanket lien can pose a serious risk to your business. 

What Can Be Done To Avoid Blanket Lien Issues?

The terms should be defined as clearly as possible in the contract. It’s particularly important to identify what assets are covered. Some lenders consider the blanket lien definition to include “all assets.” This means they could theoretically seize all of your business assets if you fail to pay them back. But, it can be hard to enforce this type of verbiage in the event of a disagreement. Although it might seem like it would protect you, the borrower, if the loan terms aren’t well defined, there's a risk that the creditor could take you to court over disputed assets.  Periodically check your business’s UCC records. You can view them through a public records search, which is free in some states. By checking any filings against your business, you’ll know if the lender used the terms that you agreed to.  It’s also possible not to know that you have a blanket lien in place. This can happen if you agreed to a secured loan without understanding the fine print.  Some lenders don’t release liens even after you’ve paid back your loan. If that happens, you’ll need to follow up to ensure that the UCC filing is removed. Otherwise, it can be difficult to secure new funding. 

Alternative Financing and Funding Opportunities

If you’re considering a loan that includes a blanket lien, it’s worth considering alternatives first. There are several alternative options for business funding.  The best funding sources for your business depend on several factors, such as your credit score. You may need to work with potential lenders and other funding sources to find the best fit.  For equipment, consider leasing instead of purchasing. Leasing is often easier and faster than securing a loan, because you won’t need a large amount of cash upfront. When the lease ends, you can decide whether to renew it or purchase or return the equipment.  Grants are one popular option for alternative funding because unlike loans, grants don’t need to be paid back. There are grants available from the federal government, local governments, and companies. Some grants are specifically designated for business owners who are women, veterans, or minorities.  A Merchant Cash Advance (MCA) is another form of funding. MCAs are paid back to the lender as a percentage of your future credit card sales. One benefit of an MCA is that the more sales you make, the faster you can pay your creditor.  Crowdfunding is a popular way for small businesses to get startup capital. With crowdfunding, you pitch your business idea, and potential customers and other supporters can invest. There are a variety of platforms, but there’s usually little risk for investors. If your business doesn’t take off, many sites return money to funders.  Fora Financial offers alternative funding methods, including small business loans and MCAs. Contact us today for a free quote. [cta-freequote]

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