How Can A UCC-1 Blanket Lien Affect Your Business?

When you get approved for a business loan, both you and the lender hope that the capital will help your business grow and generate more profits. However, a number of things can cause business growth to slow down or stall, and you might find yourself struggling to keep up with your loan payments. To protect themselves in such situations, most lenders usually secure a loan with a lien on a specific piece of collateral or with a blanket lien.

A blanket lien is pretty far-reaching. If you default on the loan, the blanket lien gives the lender the power to seize and sell any and all business assets to repay the debt.

While this might sound scary, the good news is that most lenders enforce a lien only as a last resort. If you’ve just missed a payment or two, your lender likely won’t rush to court to enforce a lien. In fact, the lender most likely will be willing to talk with and possibly even arrange a payment plan. Only if these measures don’t work, will the lender consider enforcing a lien against your assets.

That said, a lien can have serious implications for you and your small business’s finances even if you never default on your loan. Simply having a lien on your record can make it difficult to get additional financing in the future. You can become a smarter borrower by learning everything there is to know about blanket liens, including what they are, when a lender can enforce them, and how they affect your access to financing.

What Is a UCC-1 Blanket Lien?

A blanket lien gives a lender the right to seize almost every kind of asset and collateral the borrower owns in order to pay off debt. This includes commercial real estate, equipment, inventory, accounts receivable, and even intangible assets like intellectual property. As the name suggests, a blanket lien covers all the assets that belong to a business. This type of lien provides maximum protection for a lender in the case of a default.

Blanket liens are often called UCC-1 liens, after the section of the Uniform Commercial Code that regulates these types of liens. Under the UCC, lenders typically file a blanket lien with the secretary of state’s office in the state where you do business. The lender must also include a copy of the blanket lien in the loan agreement. The lien is a public filing that other creditors can look up. Lien records show a prospective lender that another lender has already made a loan to the business and has a security interest in the business’s assets.

The lender has to provide the following information when filing a UCC-1 blanket lien:

• The borrower’s name and contact info
• The lender’s name and contact info
• A description of the collateral that’s subject to the lien (this is very broad in the case of a blanket lien)

States can make certain changes to the UCC, but almost all states adopt the same requirements. A blanket lien typically expires in five years. If the loan has a longer term than five years, the lender has to file a renewal to maintain the blanket lien against your assets.

Blanket Liens vs. Specific Collateral

A business loan can either be secured or unsecured. With an unsecured business loan, the lender has no recourse if the borrower defaults. For this reason, unsecured loans are very risky for the lender, and only the most qualified borrowers are eligible for unsecured loan products. Lenders try to minimize their risk by extending unsecured loans only to the most creditworthy borrowers.

Secured loans offer the lender some recourse in the event of a default. For secured loans, the lender can either file a blanket lien or a lien against a specific piece of collateral. Between these two types, a lien against specific collateral offers more protection to the borrower.

Equipment loans and commercial real estate loans are great examples of liens against specific collateral. With an equipment loan, the underlying piece of equipment that you are financing serves as the collateral. If you stop making your equipment loan payments, the lender has the right to seize only the piece of equipment to recoup their losses. The same goes with commercial real estate loans. If you stop making your commercial real estate payments, the lender can only seize the real estate. Other assets, such as your inventory or intellectual property, are off limits.

Whereas specific collateral liens place limitations on what the lender can take, a blanket lien gives the lender much more power. A blanket lien gives the lender authority to seize and sell any and all business assets if you stop making your loan payments.

Which Type of Lien Does My Business Have?

You can find details about your lien in the fine print of your loan agreement. The agreement will specify exactly which assets the lien covers. If there’s only one item listed, then your loan is backed by specific collateral. But if a range of your business assets are at stake, you’re looking at a blanket lien.

Specific collateral is typically involved in the following types of loans:

• Equipment loans and leases
• Commercial real estate loans
• Asset-based loans
• Inventory financing

Blanket liens are typically involved in the following types of loans:

• Short-term loans from alternative lenders
• SBA loans
• Secured business lines of credit

When given a choice, of course, lenders prefer the blanket lien, says Edward Grebeck, the CEO of Tempus Advisors. “In the event of a borrower’s insolvency,” says Grebeck, “the value of a specific asset pledged may not be enough to repay the loan. However, if the lender has a blanket lien on the borrower’s assets, he may have an additional claim on the borrower’s remaining  assets.”

It’s important not to let a lien clause spook you from getting a small business loan. If the interest rate, fees, and repayment terms of a business loan are good, then you shouldn’t let a lien stop you from closing on that loan. After all, lending is a for-profit business. Both you and the lender hope your business will succeed and bring in lots of revenue, but the lender needs a safety net if things don’t turn out as expected.

Plus, even if there’s no lien in your loan agreement, chances are good that you signed a personal guarantee. A personal guarantee is a promise to pay back the loan on time, backed by your personal assets—such as your retirement accounts, your car, and your house. A personal guarantee gives the lender the right to seize your personal assets to pay back the debt. This basically has the same result as a lien.

How Does a Lien Affect My Business?

Obviously, a lien can negatively impact you if you’re unable to pay your loan back, and the lender has to enforce the lien. But, a lien can also affect you in more immediate ways.

As soon as a lender files a lien on your business assets—whether that’s a blanket lien or a lien against specific collateral—the lien shows up on your business credit report. It can stay on there for up to five years, so other creditors are aware of how much other secured debt you’re taking on. The report will also show the status of each lien. If a loan goes into collections, and the lender has to enforce the lien, that can hurt your business credit score (and your personal credit score as well if the lender reports to the personal credit bureaus).

The other way in which a lien can immediately affect your business is by limiting you from borrowing additional money. When a lender files a lien on your business assets, they are staking a legal claim to those assets. Other lenders might not want to loan you money until you pay off the first loan and the lien is removed. Why? Because if your loan goes into default, the first lender will get first dibs on your assets, leaving the other lenders with the “leftovers.”

Although liens make it harder to have multiple loans, that’s still possible. Sometimes, lenders are willing to take second position to a lender who already has a lien, says Tempus Advisors’ Grebeck. “If there are other lenders with liens on the same borrower’s assets, a lender can ask other lenders to sign an Intercreditor Agreement, indicating that they will all share in the assets.”

In addition, your borrowing ability depends on the total amount of assets you have. Liens can’t be valued at a higher amount than the value of the loan. For example, if you have $1 million worth of assets and have taken out a $500,000 secured loan, you could take out another $500,000 loan secured by the remaining assets.

When and How Can a Lender Enforce a Lien?

The specific process for enforcing a lien varies based on the lender and the state that you’re in. But one thing that works in your favor—lenders prefer not to enforce a lien if they can help it. Enforcing a lien can be a long, expensive, messy process, one that lenders try to avoid.

This means that if you’re late on a payment or two, the lender is most likely not going to enforce the lien. They will first try to contact you and arrange a payment plan. The payment plan might extend the repayment term of your loan or lower your monthly payments. If you continue to miss payments after going on a payment plan, the lender might consider enforcing the lien.

At that point, the lender will likely send you an official notice of default. They will go to court and obtain a judgment allowing them to seize the property that is subject to the lien. With that judgment in hand, the lender (through a court officer) can physically seize the assets from your business’s location and liquidate them. The money goes to satisfy the debt.

What You Can Do to Protect Your Business Right Now

It’s important to educate yourself about liens before you sign the dotted line of a loan agreement. Or, if you already have a loan and aren’t quite sure if you there’s a lien against you, you can take some action, too.

Here are a few things you can do to protect your business and ensure you’re in the best possible position:

• Check for liens filed against your business. You can do a lien search at your secretary of state office, or you can hire someone to do a lien search for you. If you know which of your business assets are already held by liens, you’ll be more informed when you’re considering taking on a loan that puts another lien against your business. Some states (like NY, shown above) let you do a basic lien search online, for free.
• If you find a lien filed against your business, make sure it complies with the conditions of your loan agreement. Whether by mistake or intentionally, some lenders file liens that are broader than you originally agreed to. If there’s an error, contact the lender. If the lender won’t help, your secretary of state can assist you.
• Make sure old liens have been removed. In some circumstances, liens will still show up even after you’ve paid off a loan months or years ago. If you don’t remove old liens from your file, a potential small business lender might reject your business loan application without knowing the actual circumstances of your business. As mentioned above, a lender can remove a lien for you, or the secretary of state can hep if the lender is unresponsive.
• Remember that suppliers and franchisors can also file liens against your business. Just like liens that lenders file, these liens will show up on your business credit report and can affect your ability to secure additional funding at competitive rates.

The more you know about liens, blanket liens, and loan terms, the better prepared you’ll be to make sound financial decisions for your business.

The Bottom Line

Before you commit to any small business loan, read all of your terms. Be especially wary of any provisions pertaining to liens because these can have immediate and long-term impact on your business.

Here’s what to be aware of:

• Blanket liens give a lender the right to seize and sell all of your business assets (up to the debt’s value) if you default on a loan.
• In contrast, specific collateral is more-borrower friendly because the lender can only seize the piece of collateral that underlies the loan. A franchisor or supplier can also secure collateral.
• A lien shows up on your business credit report and if your loan goes into default, this will lower your business credit score.
• A lien can limit your access to additional financing.
• The best ways to protect yourself are to check if there are loans under your business’s name and to correct any errors, which you can do through your state’s secretary of state office.

At the end of the day, a lien is simply part of the “price” of a business loan. As profit-making enterprises, lenders and banks want to guard against the possibility of nonpayment. A lien ensures they’ll get most of their money back if you default on the loan. For your part, focus on making your loan payments on time and growing your business. Do that, and you’ll never have to worry about the negative consequences of a blanket lien.