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When a borrower is especially risky, a lender may ask them to agree to a blanket lien, also known as a general lien or a UCC-1 blanket lien. A blanket lien gives the lender the legal right to seize multiple (possibly even all) assets owned by the borrower should they stop making payments on the loan. Blanket liens aren’t unusual in the small business lending world, and can give a business with thin or poor credit access to affordable financing. But because these agreements put most, if not all, of your business assets at risk, a blanket lien isn’t something you want to enter into lightly.Should you agree to a UCC blanket lien to get a business loan? Does having a lien on your business assets affect your credit? If you already have a lien placed on your business, can you get it removed? Here’s everything you need to know about blanket liens as a small business owner.
What is a Blanket Lien?
Collateral is one way lenders reduce their risk when they loan you money. If your business takes out a loan and fails to repay it according to the terms of the loan agreement, your collateral can potentially be seized and sold to help the lender recover some of its losses. For some loans, a lien against a single piece of collateral may not be enough to make a lender feel comfortable. Instead, the lender may prefer a type of lien that secures multiple assets your business owns at the same time. This is commonly known as a blanket lien, or UCC-1 blanket lien, after the section of the Uniform Commercial Code that regulates these types of liens. Under a UCC blanket lien, a lender might ask you to pledge any of the following as collateral when you’re borrowing funds:
Accounts receivable
All equipment
All vehicles
Real estate
Inventory (current and future)
Other business assets
Blanket liens are involved in many types of small business loans, including short-term loans from alternative lenders, loans backed by the U.S. Small Business Administration (SBA), and secured business lines of credit. If you have a loan and aren’t sure if there is a lien against your business, you can do a lien search at your secretary of state’s office. In some states, you can do a lien search online for free.
How Do Blanket Liens Work?
If you agree to pledge multiple assets as collateral for business funding, the lender will typically file a UCC-1 with your secretary of state to stake claim to those assets. The lender must also include a copy of the blanket lien in the loan agreement. The lien is a public filing that any creditor can look up. Lien records show a prospective lender that another blender has already made a loan to the business and has a security interest in the business’s assets. Because UCC filings are public records, they’re frequently picked up by the commercial credit bureaus. This means UCC liens may appear on your business credit reports.A blanket lien typically expires in five years. If the loan has a longer term, the lender has to file a renewal to maintain the lien on your assets.Recommended: A Guide to the Different Kinds of Promissory Notes
Blanket Lien Regulations
The Uniform Commercial Code, or UCC, is a set of laws that were created to standardize the conduct of lenders and borrowers during commercial transactions. UCC article 9 specifically lists what assets can and cannot be collateralized for a blanket lien. A blanket lien cannot, for example, secure any property that would require government consent, such as:
Business licenses, such as those issued to independent contractors
Patents, such as utility or design patents
Trademarks, such as a service mark or certification mark
Other government issued permits
UCC Article 9 serves as a guide for the drafting of lien language, but to avoid confusion between parties and to provide clear details, creditors also file a UCC-1 statement. The UCC-1 statement publicly declares a creditor's right to seize a borrower's assets if the borrower defaults. A UCC-1 is required for all business loans.The UCC-1 statement will specifically list what assets are allowed to be seized and in what order. It can also prioritize which lenders are allowed to seize assets first in case there are multiple lenders on the loan. The UCC-1 statement must be filed with local agencies in the state where the business of the borrower is located.While a blanket lien sounds ominous, most lenders will only enforce them as a last resort. To actually lay claim to any of your assets, the lender has to take you to court and win a judgment against you. If you miss a payment or two, it’s unlikely your lender will go to court to lay claim to your assets. Instead, the lender would likely want to work out a payment plan. The plan might involve extending the term of your loan or lowering your monthly payment. Generally, only if these measures don’t work, would a lender consider enforcing a blanket lien.
Removing a UCC Lien
A UCC lien stays on file for five years. If your loan doesn’t mature until after that point in time, your lender will likely renew it. You can only have a blanket lien removed after you repay your loan in full. Sometimes the lender will remove the lien themselves once your loan is repaid, but if they do not, and you’re still seeing an active lien on your credit profile, there are certain steps you can take to get the lien removed.Option 1: Call your lenderIt’s possible that you haven’t fully repaid your loan. There may be one or two payments to go, or perhaps there are still some outstanding fees on your account. To resolve the issue, call your lender to find out why the lien is still on file and what you need to do to get it removed.Option 2: WaitEven if you do nothing, a UCC-1 lien will automatically be removed after the lien’s five-year term expires. Option 3: Request a UCC-3If you have fully repaid your loan (including fees), and your lender acknowledges that you have done so, ask them to file a UCC-3. A filed UCC-3 removes the blanket lien on file with your state. You can also request a UCC-3 when you send in your final payment. Option 4: Dispute the lienIf you can’t resolve the issue with your lender, you can visit your secretary of state’s office to dispute the lien. You’ll have to provide all the paperwork showing you have repaid the loan and swear an oath that all the information is truthful. If a credit bureau is still inaccurately showing the lien, you can dispute the lien with the credit bureau.
Pros and Cons of Blanket Liens
Blanket liens give small businesses that haven’t yet built up credit, have poor credit, and/or lack any single high-value asset access to use as collateral the ability to access financing they would not otherwise be able to get. Even if you have collateral, agreeing to a blanket lien on a business loan might allow you to get a lower interest rate or a larger loan than you would otherwise qualify for. While it’s often possible to get a loan without collateral or a blanket lien, the drawback is that these types of loans often come with higher costs.Also keep in mind that, as scary as a blanket lien sounds, a lender would only enforce it as a last resort. If you make all — or most — of your payments on time, you should never lose any of your assets. And, if you did not have the blanket lien, your lender might ask you to sign a personal guarantee. With a personal guarantee, a lender can seize and sell your personal assets (such as your house, car, retirement fund) should you default on the loan, which is similar to a blanket lien.However, blanket liens also have some definite downsides. The biggest is that they give the lender the legal right to seize many, if not all, of your business assets should you become unable to repay the loan. On top of that, having a lien on file can make it more difficult for your business to secure additional financing. And, even after you fully pay off the loan, the lien may not immediately come off your credit report. This can make it harder for you to apply for a small business loan in the future.
Pros of a Blanket Lien
Cons of a Blanket Lien
Gives business with thin or poor credit access to financing
In the event of a default, borrowers can lose all of their business assets
Gives businesses that lack a single high-value asset the ability to secure a loan
Can make it difficult to get additional financing
Comparing Small Business Loan Rates
Before you commit to any small business loan, you’ll want to shop around and compare business loan rates, as well as the terms and requirements of any loan you are considering. If a business loan requires collateral, it means the lender can only seize that particular asset should you become unable to repay the loan. If a loan requires a blanket lien, it means the lender has the right to seize and sell most or all of your assets in the event of a default. If you’re interested in exploring different types of financing — both with and without blanket liens — Lantern by SoFi can help. With our online lending tool, you can review and compare offers from multiple small business lenders with just one application and without making any type of commitment.
Frequently Asked Questions
What does blanket inventory lien mean?
What is a blanket filing?
What does UCC stand for in regards to blanket liens?
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About the Author
Lauren Ward
Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
