If you’re a small business owner who is considering applying for a small business loan, there are many things that you can do in advance to prepare. You’ll want to understand what lenders are looking for, especially when it comes to liens, which is an important consideration for lenders.
In this overview, you’ll gain a clear understanding of what liens are, where they come from, and how they can impact your small business.
What is a lien?
A lien is a legal claim against a person or entity’s property or assets. Essentially, when a lender files a lien against a business, they’re granted a legal right to ownership over the borrower’s personal or business assets.
Though a business lien gives a lender a claim over your assets, these assets do not change hands as long as you repay your debts. However, if you default on a loan, then the lien gives the lender the right to seize the assets to recover the financial loss from the unpaid debt.
For example, say you need financing to purchase new equipment for your business. When you take out the loan, the lender may file a lien on business assets. This business lien alerts all other entities in your state that the lender has the legal right to seize some or all of your business assets if you default on the loan.
What types of liens apply to small businesses?
You may find several types of liens on your business assets and personal property. Here are the two most common liens for small businesses:
1. Universal Commercial Code (UCC) lien: Also referred to as a “UCC filing,” a UCC lien is often used by lenders as collateral that you pledge in exchange for a business loan. In addition to providing financial security to the lienholder, a UCC filing also lets other potential lenders know what collateral is already pledged and which lien position they’d be in if they chose to offer a loan.
There are two common types of UCC filings:
- Specific collateral lien: Gives the lender a claim to specific business assets, such as a piece of equipment.
- Blanket lien: Gives the lender the right to all business assets.
2. Tax lien: The Internal Revenue Service (IRS) or a state tax agency can issue a tax lien against a business or individual for unpaid income, sales, or other taxes. These liens can remain until the full balance of the taxes owed, along with any associated fees and penalties, is paid.
How do liens affect your business?
Each lien type can affect your business in different ways, Here’s a look at how UCC liens and tax liens affect your business:
UCC Liens
If you’ve received a loan with a bank or an alternative lender, you’ll likely have a UCC lien on your business. UCC liens are a normal part of small business financing and are required by most lenders. As long as you repay your debts and don’t default on your loan, a UCC lien won’t impact your credit score.
UCC liens are filed in succession, which means that your business can have multiple UCC liens filed at any given time. The lender who files the first lien against a business is in the first lien position and has the first claim to a business’s assets if you default on your loan. As a result, some, but not all, lenders may not loan to your business if you have an existing UCC lien filed.
Tax liens
Tax liens, on the other hand, can have a significant impact on your finances, including:
- Lower your credit score: Tax liens can appear on your credit history, which can affect your overall credit score.
- Impact your chances of loan approval: Tax liens are a part of public record, which means that when applying for a loan, lenders can look up your public lien records. Having a tax lien against you can negatively impact your chances of loan approval.
How can you check your lien status?
As a business owner, it’s critical for you to be aware of any liens against your business. Both tax and UCC liens are public record, so it’s relatively easy to check the status of liens against your business. All you have to do is visit your state website for any UCC liens, and request account transcripts through the IRS portal for federal tax liens. There are also paid services, like LexisNexis, that perform a consolidated search for all tax liens.
If a lien appears that you are unaware of, make sure that it’s yours and not an error. Contact the lienholder immediately, as getting this sorted out can take some time. If it is yours and you’re able to pay off the debt, do so. Then provide “proof of payment” to the credit bureau and ask that the lien be removed. And if you have a tax lien, you must pay it and request a “Lien Satisfaction Letter” from your county clerk.
If you’re not able to pay off a lien in full but make regular payments as agreed, you may be able to get the lienholder to verify that you’re making good on your debt, which can help when you meet with lenders.
Pursuit is here to help
Pursuit offers financing and resources to ensure all business owners have a path to success. We’ve helped thousands of small business owners to get the financing needed to launch, grow, and thrive. We offer a range of financing options for small businesses in New York, New Jersey, Connecticut, Pennsylvania, Illinois, and Delaware.
We help you get the financing you need, including more than 15 loans and a line of credit, and we offer insightful information and resources, and business advisory services for small business owners.
Contact us today to learn about how we can help you!