Plenty of online lenders advertise that you don’t have to offer specific collateral to get financing. What they ask for instead is a UCC-1 blanket lien on your business assets. A blanket lien is a broad claim by a lender on your business assets. It can give a business without much to pledge a real shot at a loan, but blanket liens aren’t exactly “nothing at stake.” Here we’ll explain the difference between a blanket lien and a loan with a lien on specific assets, and why the distinction can matter, whether you’re about to sign or already have one on file.
The Uniform Commercial Code, or UCC, is a set of laws designed to standardize commercial transactions among the US states. A UCC filing is a document issued by a lender or an equipment lease or invoice financing company to notify other companies that it has a legal claim on the debtor’s collateral should they fail to fulfill their repayment obligations. The lien can be on a specific piece of collateral, such as a vehicle, piece of heavy equipment, or specific accounts receivable, but it can also be a general claim on all of the company’s assets, commonly known as a blanket lien. With specific collateral, the lien scope extends only to the assets you agree to put up for the loan. Blanket-lien lenders don’t bother with that. Instead of filing a lien on specific equipment or each piece of property, they just take everything.
In plain terms, the question is whether the financier will take one piece of equipment for example to secure a loan or whether the financier can seize anything in the business to satisfy the loan. If you default under a blanket lien, the lender can collect on your debt by seizing and selling any of your business assets. A blanket lien claims an interest in your existing business assets, including inventory and equipment, and also in your accounts receivable and even your future inventory.
There is one limit. The lender does not have the right to seize your personal assets. However, most business lenders that require a blanket lien will also ask you to sign a personal guarantee. A personal guarantee is a promise to repay a loan personally. So in the event of default, the lender can go after your personal assets.
Even if you never miss a payment, a blanket lien can make it difficult to obtain additional financing in the future. Since it is filed with the secretary of state, you’ll find it on your credit report. If you have more than one lien, the first one filed has priority (first position) and gets first dibs. The second and third liens get what’s left. Lenders don’t like to finance second or third position liens because there’s not as good of a chance of receiving their money.
Picture an owner who is current on a loan with a blanket lien but needs more capital before it’s paid off. Even if you make all the payments on your existing loan, you may not be able to get a new one. The problem is that the new lender wants security, and you’ve tied up all your assets in a blanket lien. If a lender does eventually agree to step in behind the first one, it may charge high interest rates.
So why do lenders push for blanket liens? Creditors love to come for your stuff. They want as much collateral as they can get. Like any collateral, a blanket lien gives you a strong reason to keep paying, and if you default anyway, it increases the chance that the lender will be able to collect something on a defaulted loan. Also, when a lien covers all assets, the lender can try to recover its losses by seizing all your assets, as opposed to a single item such as the title to one vehicle. That significantly reduces their risk, which means that they’re more likely to lend money to startups or those with less-than-perfect credit or fewer valuable assets. They charge more for this service, making lots of money from the interest and fees.
Watch the marketing language, too. Because a blanket lien names no specific collateral, online lenders can advertise ”unsecured” or “no collateral” loans while still filing one. It’s an “unsecured” loan with no specific collateral. Yet the blanket lien allows it to later collect collateral. That widens the lender’s market, and it can create confusion for business owners and make it difficult for them to understand the true nature of their lender’s lien. Since unsecured means “no collateral,” people may think there are no consequences for defaulting on an online loan, even when they have real assets to lose. Not every lender that requires a blanket lien is predatory, and the practice is fairly standard among online lenders. But it hands your creditor significant leverage.
So what really happens if you stop paying? It depends on the amount outstanding and the assets you have available. In order to take anything under a blanket lien, the lender will have to sue you and win a judgment. And if there’s not much in it for them, they may not bother. But if you owe a substantial amount of money, or if you have some nice assets lying around that the lender has blanket claims on, the lender might just come for your stuff. Every situation is different. If you are in danger of defaulting, get advice from an accountant or a legal expert on your own facts. We are not a law firm, and when litigation or bankruptcy is the right call, we refer owners to an independent attorney. When the real problem is a balance the business can no longer carry, that is where a debt settlement company like ours negotiates with the funder for less than the full amount owed.
Removed After the Loan Is Repaid in Full
A blanket lien can only be removed after the loan is repaid in full. Sometimes the lender takes care of it. If it doesn’t and the lien still shows as active, you should communicate with your lender. Make sure that your account is indeed paid in full. There should be no remaining balance or any late charges. While you’re at it, ask them why the lien is still active. Ask them to file a UCC-3 (termination) for you. Ideally, you can send this request along with your final payment. If the lender refuses, you can dispute it with the secretary of state’s office. You will need to swear under oath that the loan has been repaid. You can dispute it with the credit bureau if it still shows. Finally, a lien expires after its term (usually five years). A creditor can renew a lien if the loan is still active.
If you’re still shopping for financing, read the fine print on any loan, lease or advance. Some lenders describe what they require in vague language, and some don’t file a lien at all unless they suspect you’re headed for default. But the threat of losing valuable collateral, even with an online lender, should make a collateral requirement something to seriously consider when choosing the right small business loan. If you have taken out business loans, it is wise to check your UCC filing records to make sure things are correct. UCC filings don’t require your signature, and sometimes things go wrong without you knowing about it. Your funder may have filed a broader lien than you agreed to, or they may have forgotten to release it when your loan paid off. Reviewing your records regularly can help protect you against those mistakes. You can view liens through an online public records search, though some states charge a small fee.
A high-risk business may not be able to avoid a blanket lien for now, but improving your credit may eventually qualify you for better financing. Another route is a loan with a personal guarantee and no blanket lien. If you default, the effect is much the same, but as long as you keep paying, you won’t have a lien on your credit report. Just keep in mind that many loans require both.
If you are already behind on a loan backed by a blanket lien, a first consultation with Delancey Street is free and confidential. If a cheaper option exists, or bankruptcy counsel is the better path, we will tell you on the first call.
