Many online lenders advertise (among other perks) their loans are easier to obtain since you don’t have to give you specific collateral to obtain 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 opportunity to access financing. However, agreeing to possess a lien placed on your company assets shouldn’t be used lightly. This kind of collateral can provide a lot of power to your lender and might make it difficult to get additional financing at an affordable price.
Should you accept a UCC-1 blanket lien to obtain a business loan? Should you curently have a lien put on your company, is this an issue? Keep reading to find out!
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 your business assets. Along with tangible business assets for example existing inventory and equipment, your debtor may also seize your accounts receivable as well as your future inventory.
To obtain a a bit more specific about the terminology, Uniform Commercial Code (UCC) is a set of laws created to standardize commercial transactions across all of the US states. UCC laws cover many facets of transactions between businesses, including collateral. Lenders along with other funders (for example companies that offer equipment leases or invoice financing) can file a UCC financing statement, which lets others know that there is a claim that they can certain collateral in case of a default.
Financiers can file a lien on specific collateral (such as a vehicle, a piece of heavy equipment, or your a / r), or they can claim general rights to any or all of the business’s assets. The second is known as blanket lien.
Note that a blanket lien doesn't permit the lender to get your individual assets, although most business lenders that require a blanket lien will even require a personal guarantee, which will hold you personally liable if you default in your loan.
How Blanket Liens Work
When signing for a loan, lenders often require borrower to sign a UCC blanket lien on their business assets. When you end payment in your loan, the lending company will pursue those business assets so they can liquidate these to recoup your finances them.
Blanket liens are public filings filed together with your secretary of state. This means they will show up on your credit report. Even though you don’t default on the loan, a blanket lien can cause trouble for your company. Businesses having a lien already on file may have a difficult time attaining additional forms of financing.
In occasions when you will find multiple liens placed on your business, the first lender to file a UCC lien claims priority. That means in case your business defaults on its debts, the very 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 forth, get second and third rights to whatever wasn’t claimed by the first lender. Lenders generally don’t prefer to take second or third priority since the chances they’ll get their investment back are reduced.
Here’s several blanket lien example scenarios:
- Blanket Lien Example #1: A lender files a UCC blanket lien on your business when you sign for a financial loan. You make all your payments to pay off your loan, and don’t apply for any other forms of financing during the amount of the loan term. The blanket lien doesn’t negatively affect your business, and also the lien is removed once your loan is repaid.
- Blanket Lien Example #2: A lender files a UCC blanket lien in your business whenever you sign for a loan. You are making all your payments and are on the right track to pay off the loan — however, you end up needing to make an application for another form of financing before your first loan is paid off. You have a hard time obtaining financing with the lien in your business because no lenders want to take second position. You eventually find a lender prepared to provide you with 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 whenever you sign for a loan. You're a startup business with almost no assets to talk of. You default in your loan, and the lender enforces the lien to get your business assets. You don’t lose much since you didn’t cash to start with. Obviously, your credit continues to be 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 lending company knows you'll be more motivated to repay your loan knowing you’ll lose all your business assets should you don’t. As well as if you do default, the lending company can recoup some or all of its losses together 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 lending company to seize all your business assets, rather than just one particular bit of collateral (for example the title to some specific business vehicle).
- A blanket lien reduces a lender’s risk to finance high-risk businesses, such as startups, businesses with poor credit, and businesses without any valuable assets. Consequently, lenders can offer high-priced financing to desperate businesses, making a fortune in interest and fees (and also potentially from your collateral should you default).
- Because a blanket lien doesn’t include any sort of collateral, online lenders can advertise their financing products as “unsecured” or “no collateral” loans — even though they need a UCC blanket lien. This reveals the lender’s market reach to companies that don’t have any specific collateral. Additionally, it may sometimes mislead potential borrowers, that do have collateral, into thinking they have nothing to lose when they default.
While not all lenders that need a blanket lien are necessarily predatory — the practice is pretty standard for online lenders generally — it’s vital that you comprehend the significant leverage a blanket lien gives your creditor.
When Lenders Can Enforce A Lien
Consequences for default rely on how much money you still have outstanding, and just how many assets the lending company could possibly lay claim that they can.
Due for their nebulously defined terms, blanket liens take time and effort to enforce. To really lay claim to any of your assets, the lending company needs to get you to court and win a judgement against you. If there’s a low chance they’ll get their money back, or maybe there isn’t much money to get back, the lending company might decide a trip to court is not well worth the effort. However, for those who have a large sum of capital outstanding, or perhaps a lot of valuable assets the lending company might be able to recoup, the lending company usually takes action.
Every situation is different. In times when you're in danger of defaulting on the business loan, the best plan of action would be to consult an accountant and/or a legal expert who are able to give you advice for the particular situation.
When & The best way to Remove A Blanket Lien In your Business
You may have a blanket lien removed only once you repay the 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 specific steps you can take to obtain the lien removed.
- Talk To Your Lender: First, make sure you have truly repaid the loan and don’t owe any outstanding fees. Speak to your lender about why the lien is still showing as active and what must be done before they'll remove it.
- Ask For A UCC-3: If the lender confirms you’ve paid off the loan entirely, keep these things file a UCC-3 termination to get rid of the lien. Businesses can also send a request for a UCC-3 with their final payment.
- Dispute The Lien: If for some reason you can’t settle the matter using 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 entirely. If a credit agency continues to be inaccurately showing the lien, you can dispute the lien using the credit bureau.
- Wait It Out: Keep in mind that even if you do nothing, a UCC-1 lien will be removed following the lien’s term expires. Liens usually expire after five years. However, in case your loan is still active after five years, your creditor can file to renew the UCC-1 lien.
UCC Ideas to Safeguard Your Business
Blanket liens are often unavoidable when seeking business financing as a high-risk business. But when you know your options and what you’re coping with, and you’ll be able to better make use of this type of collateral to your advantage. Here are some tips how you can keep your business assets protected from UCC-1 liens and keep your company running as smoothly as possible.
Read The Fine Print
When applying for a loan, lease, or advance, interest rates and costs are important, but so is ensuring that you understand the collateral you are setting up upon your business.
The collateral a lender requires isn’t always immediately apparent; some lenders use vague language to explain what they require, yet others don’t even file a lien unless they suspect you’re in danger of defaulting. When in doubt, ask your lender to completely explain the problem; you don’t desire to be surprised afterwards.
Check Your Business’s UCC Records
Periodically look at your UCC records if you have any active business and have taken out loans in the past. Because UCC documents don’t require your signature, a lot of things could go wrong without you knowing. Your funder might have filed a more general lien than was agreed to, or they might not have removed a lien once you paid off debt. Each one of these things might cost you money or causes of capital down the road.
Liens filed against your business can be viewed online via a public record information search. However, some states charge small fees for that service.
Work In your Credit
Know when you've got a high-risk business, you might not be capable of getting a loan with no blanket lien. If you wish to attempt to get a loan that doesn’t have a blanket lien, focus on reversing your credit damage. Even if you don’t be eligible for a a great loan now, if you take steps to repair your credit, you may eventually be eligible for a better types of financing.
Consider Signing A Personal Guarantee
Don’t desire a lien in your credit report? Consider a loan having a personal guarantee, but no blanket lien. Having a personal guarantee, you’ll still likely need to liquidate your assets should you default (that's, the result will be the same as a blanket lien), but as long while you don’t default, the guarantee won't appear on your credit profile. Just keep in mind that many loans need a personal guarantee and a blanket lien.
An illustration of a kind of loan that requires a personal guarantee but no blanket lien is really a personal bank loan, which can also be used for business.
Evaluate Your Unsecured Loan Options
Blanket liens often include so-called “short term loans.” If this is the kind of loan you’re considering, it’s important to consider all of your unsecured loan options, because not every one of them require blanket liens as well as of ones that do, some lenders are better than others. Make sure to evaluate your very best unsecured loan options — and see which ones require blanket liens and which do not — by reading our article the Top 15 Best Unsecured Loans.
