Blanket liens are when you allow a lender to take your assets like machinery or inventory without restriction if you default on loan payments. Blanket liens can be applied to both business and personal loans. Lenders will submit a UCC-1 filing to your Secretary of State’s office to create a public record, notifying other lenders that they have a right to all your business assets.
This is different from other UCC liens that identify specific collateral like vehicles or pieces of equipment. Because of this, blanket liens have pros and cons:
Pros:
- Make approvals faster because the right to all your assets gives lenders confidence they’ll recoup their losses if you default (may not need to wait for appraisals on specific assets)
- Help get you lower rates or higher loan amounts by giving the lender more flexibility in what they can claim and sell if they need to
Cons
- Restrict you from selling assets without lender approval
- Make it harder to use any assets as collateral for new loans since the original lender would be first in line to claim assets ahead of new lenders
There are multiple types of business loans and situations where a blanket lien makes sense. For example, if you expect to have an increase in cash flow in the next couple of months due to the busy season starting and your loan is short-term, a blanket lien may not be an issue.
Blanket liens do not make sense when you are investing in an expansion or planning to buy a business that will take years to become profitable, since you need to reduce your own cash flow reserves to pay for employees, operations, and supplies. In this situation, you’ll likely need to take other/additional business loans, which will be difficult to get approved for since your assets will already be tied up with the existing blanket lien.
This guide walks you through the types of business loans that use blanket liens more often, what you can negotiate during the loan application process, and, if a blanket lien is required, how to protect yourself.
The Types of Business Loans Blanket Liens Are Used For
Blanket liens are mostly used for short-term loans when borrowers need money fast, can repay the loan quickly, and when it doesn’t make sense to go through long appraisal processes. The shorter payback period means you’ll get the lien released quickly, letting you use the assets for other loans or sell them if needed.
Here are common business loan types where lenders will ask for blanket liens, along with the reasons why and pitfalls to watch for:
- Merchant Cash Advance
Working Capital Loan
Working capital loans fund advertising, payroll, consumables, and other operating expenses that aren’t necessarily collateral, so lenders ask for blanket liens to ensure they don’t lose money if you spend the loan proceeds but don’t get enough revenue back to repay it. This keeps their risk low so they can approve you quickly, as working capital loans are normally used for immediate and time-sensitive expenses.
Before you agree to a blanket lien, make sure you’re confident that future cash flow is enough to cover upcoming operating expenses in addition to the loan payments. Otherwise, you will have a hard time getting additional funding since the current lender has already claimed the right to your assets.
Bridge Loans
Bridge loans are temporary financing to close a time-sensitive deal and come with higher interest rates and shorter payback periods. This type of loan gives a borrower enough cash flow to close the deal while they wait for long-term and/or larger financing solutions to fund. Lenders ask for blanket liens on bridge loans in case the permanent funding you’re waiting on doesn’t come through, putting you in a difficult financial position.
Because the bridge loan is paid off quickly by the borrower, there is less risk in losing everything as long as you feel secure that the larger funding will come through. This can apply to real estate where investors use bridge loans while waiting to close escrow. For example, if something kills the deal, the investor won’t own the building and can’t charge rent to increase cash flow.
It also applies to a business bridge loan where you’re buying a competitor. A blanket lien is fine for renovations for a business that is already thriving, as you’ll be upgrading the ambience or capabilities, and money will already be coming in. However, if you must buy new equipment, renovate, train staff, and build a larger customer base, a blanket lien may put you at risk, as your current business and the new one can both be claimed by the lien holder.
In a case like this, see if you can instead do a UCC filing with specific assets like the new equipment and possibly one or two assets from your current business. This way, you don’t risk losing everything if you default.
Pro-tip: Have a backup plan if permanent funding doesn’t come through. Otherwise, you’ll be stuck paying the bridge loan back and funding the project from whatever cash flow you currently have.
Merchant Cash Advance
Merchant cash advances (MCAs) are where a borrower pays a lender back by giving them a percentage of their future sales, so the lender may ask for a blanket lien to give them the right to these future cash flows, not just current assets. MCAs can be given by vendors and suppliers you work with, investors, alternative lenders, and even fintechs.
Be careful with blanket liens for MCAs. If future sales don’t come in as expected, the lender can claim your assets and you may still owe them additional money on the loan.
How Blanket Liens Impact Selling Assets
Blanket liens require you to get approval from the lender when you want to sell assets, whether you are doing so to improve or expand operations, upgrade your facilities, or because you no longer need them.
The good news is that growth is a good sign to a lender. If they see this as an opportunity for greater profitability, it reduces the risk on you as a borrower, so they’ll likely approve the asset sale.
Here are three situations where you may need to negotiate to get the approval:
- If you are selling major equipment
- If you are offloading surplus inventory
- If you are selling newly developed intellectual property
Selling Equipment
Lenders will block equipment sales when they can’t forecast that you’ll have enough cash to keep making loan payments. This could be a sale for physical cash when the equipment is needed to keep production up and you haven’t found a replacement, or when they think the sales price is too low.
By researching equipment resale values in advance and showing how the money will either be used to keep business strong or to purchase a more efficient or productive piece of equipment, you may get the lender to agree to the sale. From there, the lender will need to add a clause to the loan agreement allowing you to sell the equipment.
Offloading Surplus Inventory
Offloading surplus inventory from last season or off sizes will generate less cash than the retail value, so lenders may block the sale if they think it’s worth more or if the lower value throws off their internal risk guidelines.
Try showing the lender how inventory from past seasons declines in value as time goes on, so that they understand how a quick sale is in their interest. Then work with them to set date and time milestones in advance where you sell remaining inventory in bulk instead of letting it sit and lose value.
Selling Newly Developed Intellectual Property
Selling newly developed intellectual property eliminates a stream of license fees that the lender can access to keep their monthly payments steady and makes them want to block the sale. Even if you could repay the loan from the sale, lenders make money from interest paid over time, and early payoffs hurt their bottom line.
A way to avoid this is by offering to put the sale proceeds into an escrow or managed account that can generate a return from investing. This will keep the monthly payments flowing so the lender makes money as planned and the return could even be high enough to create additional cash for your business. Or you can see if they’ll accept a curtailment fee where you agree to a prepayment penalty.
Which Terms to Negotiate on Blanket Liens
It’s possible to negotiate terms on blanket liens because lenders make money from your regular payments, so they don’t want to hamstring your operations or prevent growth. There are terms you’ll want to negotiate before signing a loan agreement, and some you may be able to negotiate after.
Terms Before Signing
Before closing the loan, try negotiating the following:
- Mission critical asset carve out
- Lender response time
Carve outs for mission critical assets, like trucks for a logistics business or servers for a cyber security company, let you make important and time-critical decisions without needing to wait for approval. This helps you expand more easily to meet higher demand and purchase new assets without them falling under the lien. If you can show that these lead to company and revenue growth, the lender may negotiate on them.
Another term to negotiate when a blanket lien is required on a business loan is that lenders should agree to a response time when you want to do anything requiring their approval including selling an asset. This lets you plan ahead.
Terms to Renegotiate After You’ve Signed
As you pay down the loan, renegotiate to have the lender release the blanket lien in exchange for an itemized UCC lien against specific collateral that covers the remaining loan amount. This serves both your interests, since it keeps their risk low and lets you operate more efficiently, sell assets you don’t need, and get new funding to fuel growth. If you’ve made payments on time and the lender thinks you’ll be likely to borrow again, they may be flexible and change from a blanket lien to an itemized UCC filing.
Blanket liens are nothing to fear as they are common in business loans and help lower lenders’ risk, allowing them to approve you more quickly and with better rates. However, if possible, always go for a UCC lien with specific assets listed vs. a blanket lien. Nevertheless, don’t let a blanket lien stop you from getting a business loan and growing your company.
National Funding does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors.
