Liens: What They Are, How to Get Rid of Them, and Why It MattersOctober 6, 2015 By Edward Castano
As a business owner, you’re focused on running your businesses and keeping an eye on your financial metrics. However, legal issues can put a surprise halt on your plans. Here we explain a legal term that goes hand-in-hand with financing for your business.
What is a lien?
A lien is a legal claim by a lender against a business asset that is used to secure a loan. It’s essentially an official notification by a lender that the business owes them money, and that if the business doesn’t pay it back, the lender claims the right to other business assets.
A simple example is a house: if you take out a mortgage on a house, the bank files a lien that allows them to foreclose on the house if you don’t pay the mortgage back.
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 second position gets what is left until they are paid, and so on.
Imagine two people ask to borrow money. You find out that one person has three other loans, and has already promised to pay them back before they pay you back. Who will you lend to?
Financing providers operate in the same way. All else being equal, the fewer liens that are already on your business, the larger a credit line they will be willing to extend to your business. Unfortunately, however, not all lenders release their liens as soon as you pay off the corresponding debt, and this can cause problems when other financial providers evaluate your business.
How to find liens on your business
Want to do a quick health check on your liens? 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), though for tax reasons some business incorporate in a different state.
Next, if you are incorporated in one of the 14 following states, you’re in luck: your lien search will be 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 3rd party like TLO.
How to remove a lien
If your lien search reveals obsolete liens that are tied to financing you have already repaid, you should contact the lender (the “secured party” in lien terms) and notify them that you want the lien removed, which they are required to do if they don’t have ongoing claims.
How your finance provider can help
While it is always good to have a clean lien list, finance providers can also help. They will do their own lien search, so ask them if they find liens. Good alternative lenders will work with you to help you clear old liens. For any liens that are still active, the potential financier can potentially buy them out and help you combine your financing in one place – similar to a credit card balance transfer.
Considering applying for financing? Read up on good debt, bad debt, and metrics to consider before pursuing credit, or use just 5 question to choose the best financing for your business.