When & Why Your Small Business Lender Requires A UCC Blanket Lien
Many online lenders advertise (among other perks) that their loans are easier to obtain because you don’t have to offer specific collateral to get financing. Instead, these lenders require a general lien, called a UCC-1 blanket lien, on your business assets.
This lien really does give businesses without compelling assets the chance to access financing. However, agreeing to have a lien placed on your business assets shouldn’t be taken lightly. This type of collateral can give a lot of power to your lender and might make it difficult to find additional financing at an affordable price.
Should you agree to a UCC-1 blanket lien to get a business loan? If you already have a lien placed on your business, is this a problem? Keep reading to find out!
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What Is A UCC-1 Blanket Lien?
Having a UCC-1 blanket lien on your business assets means that if you default on your business loan, the lender can seize all of your business assets. In addition to tangible business assets such as existing inventory and equipment, your debtor can also seize your accounts receivable and even your future inventory.
To get a little more specific about the terminology, Uniform Commercial Code (UCC) is a set of laws created to standardize commercial transactions across all the US states. UCC laws cover many aspects of transactions between businesses, including collateral. Lenders and other funders (such as companies that offer equipment leases or invoice financing) can file a UCC financing statement, which lets others know that they have a claim to certain collateral in the event of a default.
Financiers can file a lien on specific collateral (such as a vehicle, a piece of heavy equipment, or your accounts receivable), or they can claim general rights to all of a business’s assets. The latter is called a blanket lien.
Note that a blanket lien does not allow the lender to seize your personal assets, although most business lenders that require a blanket lien will also require a personal guarantee, which will hold you personally liable if you default on your loan.
How Blanket Liens Work
When signing for a loan, lenders often require the borrower to sign a UCC blanket lien on their business assets. In the event that you stop paying on your loan, the lender will pursue those business assets so they can liquidate them to recoup the money you owe them.
Blanket liens are public filings filed with your secretary of state. This means they will show up on your credit report. Even if you don’t default on a loan, a blanket lien can cause problems for your business. Businesses with a lien already on file may have a difficult time attaining additional forms of financing.
In instances when there are multiple liens placed on your business, the first lender to file a UCC lien claims priority. That means if your business defaults on its debts, the first lender that filed a lien (also known as the first position lender) get first dibs on your stuff. Those lenders who filed second, third, and so on, get second and third rights to whatever wasn’t claimed by the first lender. Lenders generally don’t like to take second or third priority because the chances they’ll get their investment back are reduced.
Here’s a few blanket lien example scenarios:
- Blanket Lien Example #1: A lender files a UCC blanket lien on your business when you sign for a loan. You make all your payments to pay off your loan, and don’t apply for any other forms of financing during the duration of your loan term. The blanket lien doesn’t negatively affect your business, and the lien is removed once your loan is repaid.
- Blanket Lien Example #2: A lender files a UCC blanket lien on your business when you sign for a loan. You make all your payments and are on track to pay off your loan — however, you end up needing to apply for another form of financing before your first loan is paid off. You have a hard time obtaining financing with the lien on your business because no lenders want to take second position. You eventually find a lender willing to offer you a loan, but because you have a lien, the new lender charges you high interest rates.
- Blanket Lien Example #3: A lender files a UCC blanket lien on your business when you sign for a loan. You are a startup business with hardly any assets to speak of. You default on your loan, and the lender enforces the lien to seize your business assets. You don’t lose much because you didn’t have much to begin with. Of course, your credit is still trashed.
Why Lenders Require A Blanket Lien
Like other forms of collateral, a blanket lien reduces a lender’s risk when financing your business. The lender knows you will be more motivated to repay your loan if you know you’ll lose all your business assets if you don’t. And even if you do default, the lender will be able to recoup some or all of its losses with your assets.
Blanket liens also have certain advantages for lenders that specific collateral does not:
- In the event of default, a blanket lien allows the lender to seize all your business assets, rather than just one particular piece of collateral (for example the title to a specific business vehicle).
- A blanket lien reduces a lender’s risk to finance high-risk businesses, such as startups, businesses with bad credit, and businesses without any valuable assets. As a result, lenders can offer high-priced financing to desperate businesses, making a ton of money in interest and fees (and also potentially from your collateral if you default).
- Because a blanket lien doesn’t include any specific collateral, online lenders can advertise their financing products as “unsecured” or “no collateral” loans — even though they require a UCC blanket lien. This opens up the lender’s market reach to businesses that don’t have any specific collateral. It can also sometimes mislead potential borrowers, who do have collateral, into thinking they have nothing to lose if they default.
While not all lenders that require a blanket lien are necessarily predatory — the practice is pretty standard for online lenders in general — it’s important to understand the significant leverage a blanket lien gives your creditor.
When Lenders Can Enforce A Lien
Consequences for default depend upon how much money you still have outstanding, and how many assets the lender might be able to lay claim to.
Due to their nebulously defined terms, blanket liens are difficult to enforce. To actually lay claim to any of your assets, the lender has to take you to court and win a judgement against you. If there’s a low chance they’ll get their money back, or if there isn’t that much money to get back, the lender might decide a trip to court is not worth the effort. On the other hand, if you have a large sum of capital outstanding, or a lot of valuable assets the lender might be able to recoup, the lender might take action.
Every situation is different. In a situation when you are in danger of defaulting on a business loan, the best course of action is to consult an accountant and/or a legal expert who can give you advice for your particular situation.
When & How You Can Remove A Blanket Lien On Your Business
You can have a blanket lien removed only after you repay your loan in full. Sometimes the lender will remove the lien themselves once your loan is repaid, but if they do not and you’re still seeing an active lien on your credit profile, there are certain steps you can take to get the lien removed.
- Talk To Your Lender: First, make sure you have truly repaid the loan and don’t owe any outstanding fees. Talk to your lender about why the lien is still showing as active and what needs to be done before they will remove it.
- Ask For A UCC-3: If the lender confirms you’ve paid off your loan in full, ask them to file a UCC-3 termination to remove the lien. Businesses can also send a request for a UCC-3 with their final loan payment.
- Dispute The Lien: If for some reason you can’t settle the matter with the lender, you can visit your secretary of state’s office to dispute the lien. You’ll have to swear an oath that you’ve repaid the loan in full. If a credit bureau is still inaccurately showing the lien, you can dispute the lien with the credit bureau.
- Wait It Out: Keep in mind that even if you do nothing, a UCC-1 lien will automatically be removed after the lien’s term expires. Liens usually expire after five years. However, if your loan is still active after five years, your creditor can file to renew the UCC-1 lien.
UCC Tips To Safeguard Your Business
Blanket liens are often unavoidable when seeking business financing as a high-risk business. But if you know your options and what you’re dealing with, and you’ll be able to better use this type of collateral to your advantage. Here are some tips on how you can keep your business assets safe from UCC-1 liens and keep your business running as smoothly as possible.
Read The Fine Print
When applying for a loan, lease, or advance, interest rates and fees are important, but so is ensuring that you understand the collateral you are putting up against your business.
The collateral a lender requires isn’t always immediately apparent; some lenders use vague language to describe what they require, and others don’t even file a lien unless they suspect you’re in danger of defaulting. When in doubt, ask your lender to fully explain the situation; you don’t want to be surprised later on.
Check Your Business’s UCC Records
Periodically check your UCC records if you have any active business or have taken out business loans in the past. Because UCC documents don’t require your signature, many things could go wrong without your knowledge. Your funder may have filed a more general lien than was agreed to, or they may not have removed a lien after you paid off debt. All these things could cost you money or sources of capital down the line.
Liens filed against your business can be viewed online via a public records search. However, some states charge small fees for the service.
Work On Your Credit
Know that if you have a high-risk business, you may not be able to get a loan without a blanket lien. If you want to try to get a loan that doesn’t have a blanket lien, work on improving your credit score. Even if you don’t qualify for a great loan now, if you take steps to fix up your credit, you may eventually qualify for better forms of financing.
Consider Signing A Personal Guarantee
Don’t want a lien on your credit report? Consider a loan with a personal guarantee, but no blanket lien. With a personal guarantee, you’ll still likely need to liquidate your assets if you default (that is, the effect will be the same as a blanket lien), but as long as you don’t default, the guarantee will not show up on your credit profile. Just keep in mind that many loans require a personal guarantee and a blanket lien.
An example of a type of loan that requires a personal guarantee but no blanket lien is a personal loan, which can also be used for business.
Evaluate Your Unsecured Loan Options
Blanket liens often come with so-called “unsecured loans.” If this is the type of loan you’re considering, it’s important to look into all of your unsecured loan options, because not all of them require blanket liens and even of ones that do, some lenders are better than others. Be sure to evaluate your best unsecured loan options — and see which ones require blanket liens and which do not — by reading our article the Top 15 Best Unsecured Business Loans.