Access to the right business funding can open doors for your company. It can help you to take advantage of growth opportunities you might have had to pass on otherwise. But before you can convince a lender to hand over the funds you’re asking to borrow, that lender needs to be sure it’s comfortable with the risk.
Collateral is one way lenders reduce their risk exposure when they loan you money. If your business takes out a loan and fails to repay according to the terms of its agreement, your collateral can potentially be seized and perhaps resold to help the lender recover some of its losses.
For some loans, a lien against a single piece of collateral isn’t enough to make a lender feel comfortable. Instead, the lender may prefer a type of lien that secures multiple assets your business owns simultaneously. This is commonly known as a blanket lien.
What Is a Blanket Lien?
A blanket lien is a form of cross collateralization a lender uses when it wants you to pledge more than one asset to secure your business loan. If you agree to pledge multiple assets as collateral for business funding, the lender will typically file a UCC-1 with your secretary of state to stake claim to those assets. (You can learn more about how UCC filings work in this guide.)
Blanket liens aren’t unusual in the business financing world and they’re not automatically cause for alarm. In fact, they’re commonly required on loans guaranteed by the Small Business Association.
Nonetheless, blanket liens do represent a higher level of risk for you, the borrower. As such, it’s important to you review all loan documents carefully before you sign.You should always understand what you’re agreeing to put on the line in the event something goes wrong.
A lender might ask you to pledge any of the following as collateral when you’re borrowing funds under a UCC blanket lien:
- Accounts Receivable
- All Equipment and Vehicles
- Inventory (Current and Future)
- All Business Assets
How Unpaid Debts Affect Your Business Credit
When your business is approved for a secured loan, the lender will often record a lien against your asset(s) with a form known as a UCC-1. (UCC stands for the Uniform Commercial Code.) Remember, a UCC blanket lien could mean the lender has a right to claim all of your business’ assets in court if you default on the loan.
UCC filings are public records. As such, they’re frequently picked up by the commercial credit bureaus. This means UCC liens may appear on your business credit reports.
A UCC lien isn’t automatically negative, like a federal tax lien for instance. As long as you’re on time with all of your payments, a UCC lien likely won’t impact your business credit scores negatively. But even if your payment history is spotless, the mere presence of a UCC filing on your business credit report might make it harder to qualify for future business financing.
Remember, commercial credit scores aren’t the only factor lenders consider when you apply for new financing. Good business credit scores aside, an outstanding UCC lien filing can make your business a higher risk in a lender’s eyes. Future lenders often won’t want to be second in line for your company’s assets, especially if another lender has a UCC blanket lien filed against your company.
How to Remove a UCC Lien
A UCC-1 protects a lender’s interests in your pledged asset(s) for up to five years. The lender may also have the right to refile, depending upon the terms of your loan agreement.
However, what happens if you pay off a loan before a UCC’s five years has lapsed? What if five years have already come and gone but an outdated UCC lien filing still remains on your business credit report? In both of these scenarios, it’s up to you to try to get the erroneous UCC lien removed from your business credit reports.
3 Ways to Remove an Incorrect UCC Lien Filing
- Ask the lender to file a UCC-3 if you’ve already paid back the loan.
- Visit your secretary of state’s office and swear an oath that you’ve paid the debt in full.
- Dispute credit reporting errors with the commercial credit bureaus.
Want more details on how to remove an incorrect UCC filing? Check out this helpful guide.
Frequently Asked Questions
How do liens work?
Whenever you pledge an asset to secure a business loan, the lender will generally want to stake its claim on the collateral you provide. The lender accomplishes this by placing a lien against your business asset — aka filing form UCC-1 with your secretary of state.
Assuming no other creditor has already placed a lien on the asset(s) first, a UCC lien simply makes sure the creditor is first in line to claim the asset(s) you pledged if your business ever defaults on the loan.
What is a first lien and a second lien?
It’s sometimes possible to take out multiple secured loans and use the same assets as collateral more than once. When this happens, multiple lenders may file a UCC lien against the same business assets. This is known in the lending world as a first and second lien.
Of course, it can be difficult to find a lender that’s willing to accept an asset that’s already been pledged to someone else. Here’s why.
The first lender to file a UCC lien has the highest priority (aka the strongest legal claim) to the assets if something goes wrong and you don’t repay the loan. The secondary lien holder may only get a chance to claim a portion of your assets if there’s anything left over after the first lien holder has recouped its losses.
Do liens expire?
Once a lender approves you for financing, it can file a UCC-1 statement with your secretary of state. This gives the creditor a priority claim to the asset (or assets) you agreed to put up as collateral when you applied for financing — such as property, equipment, or a blanket pledge of all business assets.
UCC liens don’t last forever. Most have a five-year term. A lender may, however, have the option to renew a UCC filing if your loan will still be active once the initial five years has passed.
Unfortunately, creditors don’t always release UCC filings automatically when you pay off your loans either. As a result, it’s important to personally follow up and make sure any UCC filings against your business are released once you’ve satisfied your debt.
Do you plan to apply for new financing in the near future? If so, this is especially important. It’s a good idea to check your business credit reports and conduct a UCC lien search to make sure the information available about your business is accurate.
Who can file a lien?
Liens are commonly filed against businesses by lenders and creditors. However, the Uniform Commercial Code doesn’t restrict lien filings to these two groups. In fact, according to Section 9-509 of the UCC, anyone can file a lien against a debtor, as long as they have an initial financing statement (commonly referred to as a security agreement).
Remember, UCC-1 is a legal form. This means lenders, creditors, and everyone else has rules to follow before they’re allowed to file UCC liens against your business. On the federal side, the UCC determines who is allowed to file a UCC lien against your business (and when they can do so). States have individual filing rules as well.
Should I get a blanket loan?
Blanket loans are a type of commercial loan commonly used in the real estate world by investors who want to purchase more than one property at a time. The loans can also be useful for developers who wish to build multiple properties under a single financing umbrella.
In exchange for a blanket loan, the lender typically gets a blanket lien attached to all of the properties being purchased with the financing. As a result, investors may potentially (though not always) be able to secure better rates since all of the properties being purchased serve as collateral for each other.
If you’re considering a blanket loan, it’s important to make sure your loan includes a release clause you can trigger once you’ve built up sufficient equity in some of the other properties included in the loan. Otherwise, you could face challenges if you wish to sell an individual property from within the group.
Additionally, be honest with yourself about the risk involved and make sure you’re comfortable with it. If you have trouble keeping up with the monthly payments on a blanket loan, all of the properties tied to the loan could be at risk for foreclosure, not just one.
This article was originally written on August 28, 2019 and updated on October 25, 2019.
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