As business owners explore the different ways to obtain funding, the term “blanket lien” may come up with certain lenders. A lien itself is a legal claim against an asset that has been used as collateral. A blanket lien is a lien against multiple assets. Let’s learn exactly how a blanket lien works when you might come across them, and how it can impact your business. That way, you can decide if you want to take on the additional risk of blanket liens when you are securing financing.
Definition and Examples of Blanket Liens
A blanket lien entitles a creditor to seize multiple business assets in the event of nonpayment by the debtor. With a legal claim to various assets, lenders are provided with increased protections versus only having a right to a single piece of collateral to recover any potential losses. For example, let’s say that you are a small business owner who is requesting a $16,000 increase to your previous $10,000 Covid-19 Economic Injury Disaster Loan (EIDL) from the Small Business Administration (SBA). The SBA requires business assets be used as collateral for loans greater than $25,000. In this case, you would have to use your business assets as collateral to secure the funding because your total loan would be $26,000. So, if you had a painting business you would likely have to use your inventory, accounts receivable, and delivery vehicle as collateral under the blanket lien.
How Blanket Liens Work
Blanket liens work similarly to other liens with secured loans, or loans that require the backing of collateral for funding, only they are for a group of assets or all of a borrower’s assets. For example, if you have a transportation business, a lender may place require the right to place a lien against your entire fleet of vehicles versus just one car. Lenders will file a UCC-1 with your state. The UCC form is a legal financing statement that outlines the debtor, secured party, and collateral. Each secretary of state website will list the form publicly. A blanket lien gives the lender a right to the assets if you defaulted on the loan. So, business owners should carefully assess the risk of losing their assets before securing a blanket loan. The majority of blanket liens are effective for five years from the filing date. If your loan term is longer, your lender may file a continuation statement to extend the UCC filing.
Types of Blanket Liens
In some situations, a borrower might need to take out more than one loan using multiple business assets as collateral. Let’s say that ABC Painters applied for a loan with two lenders over the span of a year, both of which required the company to pledge all business assets at signing. In this case, the business owner would be taking out a loan subject to a first and second blanket lien. Being that the first creditor takes legal precedence, business owners may find it more difficult to pledge the same assets to numerous lenders. UCC-1 filings are recorded in a public filing system, so other lenders and credit reporting agencies, among others, have free access. Businesses that pay off loans with blanket liens should file a UCC-3 form to have the lien terminated because lenders may not automatically remove records of the lien.
