Business owners who take out loans for equipment, property or working capital need to understand how liens can affect their business in terms of the potential problems they can cause and what should be avoided.
Lenders usually file liens on business loans; these liens are filed in succession and a lender always wants to be in the first lien position. This means that if the business loan goes into default, that lender will be the first paid.
If you have outstanding business loans and need to borrow more, that would mean the lender you are seeking a loan from would be in a second or third lien position. This could translate into higher interest rates on your business loan, so it is imperative you review your outstanding loans to ensure you are getting the capital you need at a price you can afford.
If you are applying for a short-term loan, your lender may take a blanket lien, which gives them the right to seize other assets in the event of nonpayment. If the blanket lien is in the first lien position, this could cause big problems down the road.
All lenders must file a UCC-1 financing statement when they file a lien, so business owners can check the status of their company’s liens by searching the Secretary of State’s website in the state where your company is headquartered.
Business owners can sometimes overlook important lien information in the fine print of loan documents, which is why it is important to have your business attorney review your loan documents before you sign on the dotted line.