Money management

What Are Liens & How Do They Work?

What Are Liens & How Do They Work?

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If you’ve ever taken out a loan for your business, house, or car, you’ll most likely have a lien placed on your assets. But what exactly is a lien, and how can it affect you and your business? Read on to find out more.

What is a lien?

A lien is a legal claim by a lender on the right to claim a business asset or take legal action in the event a borrower can’t pay back on a loan. Liens can often be found on public record, and potential lenders like to search for liens to inform them of existing debts.

How do liens work?

Lenders like to issue liens because it provides additional security and helps minimize the risk of issuing loans. For example, let’s say you take out a mortgage on a house. The bank will then file a lien that allows them to foreclose on the house in case you are unable to pay back the mortgage. Now, the lender has a higher chance of getting repaid.

UCC (Universal Commercial Code) liens operate in a “First come, first served” manner. If something happens and a business isn’t able to repay its lenders, the lender in “first position” gets paid first, the lender in the second position gets what is left, and so on.

Why liens matter to your business

Liens matter especially if you have a history of taking out loans with other lenders. Generally, the fewer liens that are already on your business, the larger a credit line lenders will extend to your business. But in some cases, there are lenders that won’t release the lien even if you pay off the loan. This can cause problems down the line because potential creditors will be less likely to lend to you.

How to find liens on your business

Want to find out if you have any existing liens on your business? First, you need to know what state your business is incorporated in. Most likely this is your headquarters state (particularly if you are a sole proprietor).

Next, if you are incorporated in one of the 14 following states, you’re in luck: your lien search is free. Click on the appropriate link to go to the lien search box and find your business there. The 14 states with free searches are Alaska, Arizona, Colorado, Florida, Iowa, Kentucky, Massachusetts, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Rhode Island.

If your state doesn’t show up in that list, you can still do a search for a small fee through the Secretary of State or a third party like TLO.

How to remove a lien

If your lien search reveals you have liens tied to financing you have already repaid, contact the lender and notify them that you want the lien removed. They are required to do this if they don’t have ongoing claims. Otherwise, here are some other ways to remove a lien.

  • Pay your loan off: To officially remove a lien, you’ll have to pay off the debt in its entirety.
  • Negotiate: Some creditors are willing to negotiate if you’re able to pay off some portion of the loan immediately.
  • Dispute: If you find that there is an invalid lien against you and the creditor refuses to release the lien, you may need to take legal action with the lienholder.

How your lender can help

While it is always good to have a clean lien list, your lender can also help. They will do their own lien search, so ask them if they find liens. Good lenders will work with you to help you clear old liens. For any liens that are still active, the lender can potentially buy them out and help you combine your financing in one place – similar to a credit card balance transfer.