What Is A UCC Blanket Lien?
Many online lenders advertise (among other perks) that their loans are easier to get 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 having 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? Keep reading to find out!
What Is A UCC Lien?
The 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.
First Position, Second Position…
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 is, if your business defaults on its debts, the first lender that filed a lien (also known as the first position lender) gets 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.
How Lenders Respond to Existing Liens
Operating a business is anything but clear cut; some merchants might need to seek additional forms of financing while they have debts outstanding. For example, in this NY Times piece, loan broker Ami Kassar discusses difficulties his clients have experienced regarding blanket liens. This particular client was seeking invoice factoring:
[W]e were surprised to learn that the company had entered into a purchase-finance agreement for a small piece of equipment a few months earlier, and the equipment seller had placed a blanket lien on all of our client’s assets, including its receivables. Without removing this lien, the transaction could not proceed because the factor, understandably, insisted on being in the first position on the asset they were lending against.
In the above scenario, the lender had to refinance the equipment loan with funds from the invoice factoring agreement. In doing so, the first financier removed their lien and the new one was able to take first position.
Other lenders might agree to take second position. However, in exchange for the increased risk, the new lender will normally charge higher interest rates and fees.
A word of warning: While there are legitimate situations in which you might have multiple loans or other types of financing at once, please be careful about taking on too much short term debt at the same time, as it endangers your business and your lender’s investments. Such a practice is called loan stacking, and it’s almost always a bad idea. Learn about loan stacking — and how to avoid it — in our complete guide.
In cases in which you’re seeking multiple types of financing at the same time, it’s best to fully communicate the situation with all of your financiers to ensure they’re all on board with the situation.
What Happens If I Default?
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.
UCC Tips To Safeguard Your Business
Let’s turn this information into action. Here is how you can keep your business assets safe and your business running as smoothly as possible.
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.
Your work doesn’t stop there: periodically check your business’s UCC records. 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.
Blanket liens are often unavoidable when seeking business financing. Know what you’re dealing with, and you’ll be able to better use this type of collateral to your advantage.