If you haven’t read it, brush up on secured vs. unsecured loans.
A lien, otherwise known as a Universal Commercial Code (UCC) filing, is a legal form that allows a creditor to tell the world that they have a claim on your business assets until they are repaid. Liens can be specific about which asset they’re laying claim to, or they can be a ‘blanket lien’. An important aspect of liens is who is ‘first’. The person who has the first lien against your business gets paid back first.
The same idea applies in business depending on which type of loan agreements you have in place. If it’s equipment, the lender takes back the equipment. If you have a secured line of credit based on your AR + inventory, the lender has rights to the inventory in the case of default.
While it’s uncommon for liens to be exercised, it’s more common as a way for a creditor to mitigate their risk. If a business has secured financing against an asset, say their accounts receivables (AR), a lien is put in place. If there was not a lien put in place, there is room for a bad-acting business to take out financing with another institution on that same AR asset, and there would be no way for the 2nd financial institution to know about the first financial institution having provided funding against that same AR asset
Liens may seem scary but they really aren’t. They are mainly a way for creditors to establish a legal pecking order without having to directly negotiate if things go south. Just like everything in finance, it’s all about mitigating risk.