Business owners who borrow money for equipment or working capital usually pay a great deal of attention to the interest rates and repayment terms of their loans. However, Ami Kassar writes in the Wall St. Journal that it’s also important to investigate whether the lender has attached any liens to the debt.
A lien is a legal claim on a loan that functions as a security interest. If the borrower does not fulfill his debt obligations, the lien holder is able to sell the borrower’s asset(s) in order to recoup his funds. Multiple liens are possible, with lenders desiring the first lien position so that they will be first in line to acquire assets in case of a loan default.
Why are liens so important for business owners who borrow? Kassar points out that in the case of cash advances or short-term loans, some lenders will take a “blanket lien” giving them the right to seize any or all of the borrower’s assets in the event of nonpayment. The business owner might believe he has only a particular asset subject to the lien when in reality all his assets are exposed. In addition, lenders who are in second or subsequent lien positions are taking on more risk and usually charge the borrower a higher interest rate. A borrower who needs additional funding after a first lien has been filed may therefore find it very expensive or even impossible to obtain.
For more information about the potential effects of liens on your business, plus tips on how to check for liens against your company, read the full article here.