Blanket Liens & Their Effects on Small Businesses & Startups

When it comes to borrowing money, it's not just about the interest rate. Lurking in the fine print of lending agreements, you'll find restrictive terms like blanket liens and loan covenants that can trip up even the savviest of entrepreneurs.

But fear not. In this blog post, we'll demystify these financial jargon and explain the impact blanket liens can have on your small business or startup.

We’ll also provide examples of alternative financing that don’t include such restrictive terms. So buckle up and join us for a wild ride through the world of blanket liens.

What Is a Blanket Lien & How Does It Work?

Let’s get right to it. A blanket lien, also known as a UCC-1 lien, gives a lender the right to seize almost every kind of asset and collateral the borrower owns in order to pay off debt.

It can include commercial real estate, equipment, inventory, accounts receivable, and even intangible assets like intellectual property. As the name suggests, a blanket lien covers all business assets, providing maximum protection for a lender in the case of a default.

When you get approved for a small business loan, both you and the lender hope the money will help your business grow and generate more revenue and profits.

However, business growth can slow down or stall, and you might find yourself struggling to keep up with your loan payments. To protect themselves in such situations, lenders often secure a loan with a lien on a specific piece of collateral or with a blanket lien.

Lenders are typically more inclined to include a lien or blanket lien when the borrower seems risky to lend to, which is determined during the underwriting process and is based on several factors, including credit reports, credit score, an unclear business plan, limited operating history, high debt-to-equity ratio, and more.

Blanket liens and UCC-1 liens provide lenders with maximum protection but minimum protection to the borrower, since the borrower can potentially lose all of their pledged assets if they default on debt secured using the blanket lien.

The presence of a blanket lien in a loan agreement can also affect the pricing of the loan. When a lender requires a blanket lien on all of a borrower's assets as collateral, they may be more willing to offer lower interest rates or other favorable loan terms because the presence of the blanket lien reduces the lender's risk.

Carefully consider the long-term costs of a loan with a blanket lien. While the initial pricing may be attractive, the risk of losing all of your assets in the event of default could outweigh any potential benefits. Monitor your credit report regularly as well. This can help ensure there are no errors or inaccuracies that could affect your ability to secure financing in the future.

It may be possible to negotiate for more favorable terms when working with lenders, but when negotiation isn’t working out, it’s time to look for financing alternatives.

Why Is it Called a UCC-1 Lien?

The Uniform Commercial Code (UCC) is a set of standardized laws that govern commercial transactions in the United States, including the use of blanket liens. Blanket liens are often called UCC-1 liens, after the section of the Uniform Commercial Code that regulates these types of liens.

Under the UCC, lenders typically file a blanket lien with the secretary of state’s office in the state where the business operates, providing the borrower's name and contact info, the lender's name and contact info, and a description of the collateral subject to the lien—which can be very broad in the case of a blanket lien.

This is referred to as a UCC-1 financing statement, and it establishes the lender’s security interest in the borrower’s assets.

The UCC filing is a public record that is available for anyone to view, including other creditors who may be considering extending credit to the borrower. By filing a UCC-1 financing statement, the lien holder establishes its priority legal claim to the borrower's assets and reduces the risk that other creditors will seize those assets in the event of a default.

States can make certain changes to the UCC, but almost all states adopt the same requirements. A blanket lien typically expires in five years, and if the loan has a longer term than five years, the lender has to file a renewal to maintain the blanket lien against the borrower's assets.

The UCC provides a framework for the use of blanket liens that protects the rights of both borrowers and lenders and facilitates lending and borrowing in the commercial sector.

Why Do Lenders Typically Require Collateral?

Lenders require collateral for loans as a way to reduce their financial risk and ensure repayment of the loan or recover their losses if the borrower defaults on the loan. It’s a common practice for lenders, who can use collateral to mitigate risk.

As mentioned, collateral can take many forms. The type and value of collateral required by the lender usually depend on the loan amount and the borrower's creditworthiness.

By securing the loan using collateral, borrowers can usually get lower interest rates or larger loan amounts, as it reduces the lender's risk.

That said, borrowers should be cautious when pledging collateral, as defaulting on the loan can result in the loss of the assets you’ve pledged. We can’t stress this enough.

The Advantages of Blanket Liens

We’ve mentioned a couple of the advantages of blanket liens. But let’s get a little more specific. While we aren’t the biggest fans of blanket liens (in fact, we don’t ask for collateral or include blanket liens in any of our lease agreements), there are some pros to consider:

• Flexible collateral: Blanket liens offer lenders greater flexibility in choosing collateral, as they can secure the loan with all of the borrower's assets, including those that may not be eligible for other types of security interests. This can potentially make it easier for the borrower to obtain financing because the lender may be willing to accept a wider range of collateral.
• Streamlined process: Blanket liens can sometimes simplify the lending process by avoiding the need to identify and value specific assets, which is usually time-consuming and costly. This can be advantageous to companies trying to secure financing quickly.
• Lower interest rates: This pro comes with an asterisk. The use of a blanket lien alone is not necessarily a factor in determining the interest rate of a loan—other factors such as the borrower's creditworthiness, the type of loan, the amount of collateral, and market conditions also influence the interest rate—but blanket liens can sometimes result in lower interest rates for borrowers.

Of course, there are potential drawbacks to using a blanket lien, such as the risk of losing a large pool of assets if the borrower defaults on the loan. We’ll go over those next.

As with any loan, it's important to consider the terms and conditions of the agreement before signing it to understand the potential risks and benefits of your unique situation.

The Drawbacks of Blanket Liens

While blanket liens can potentially provide advantages like flexibility and convenience for borrowers, they also have some significant drawbacks. Here are some common drawbacks to consider:

• Increased risk to the borrower: Blanket liens can expose borrowers to greater risks, as they provide lenders with broad rights to seize assets in the event of default. Because the blanket lien covers a pool of assets rather than a specific asset, the borrower risks losing multiple assets.
• Difficulty adding or removing assets: It can be complicated and time-consuming to add or remove an asset from the lien, making it difficult for the borrower to use the assets for other purposes or to secure additional loans.
• Significant Priority issues: Blanket liens can create priority issues between lenders, as multiple lenders may have competing claims on the same assets.
• Limited financing options: Blanket liens can limit a borrower's ability to obtain other forms of financing, as other lenders may be reluctant to provide loans secured by assets that are already subject to a blanket lien. This can be a disadvantage if the borrower needs additional financing in the future.
• Complex legal arrangements: Blanket liens can be more complex legal arrangements than other types of liens, requiring additional legal and administrative resources to establish and maintain.

Getting a loan with a blanket lien might not necessarily be a bad idea—it can potentially provide flexibility and convenience for borrowers—however, like any financial decision, it's important to consider the risks of a blanket lien before agreeing to a loan that includes one.

Sometimes other types of liens may be more appropriate based on your needs. Consulting with a financial advisor or attorney can also be helpful when making these types of decisions.

In our experience, it’s worth comparing your financing options before signing a loan agreement that includes such risky and restrictive terms.

When it comes to acquiring new equipment for your business, equipment leasing is a sound choice. 

As mentioned, our lease agreements do not require debt covenants, collateral, or other types of restrictive conditions. Check out our leasing program and FAQs to learn more.

Some Key Considerations for Borrowers

If you’re considering a loan agreement with a blanket lien, first evaluate the collateral you are willing to pledge since the lender will probably be able to seize all of the assets you pledge as collateral in the event of default.

The lien will likely cover all future assets as well, so choosing items that are non-essential to your business’s daily operations, if possible, is essential. You should also review the other loan covenants that are included in the agreement.

Borrowers should, when possible, try to negotiate fair and reasonable terms to protect themselves from the risks of blanket liens and strict requirements.

For example, a borrower might be able to negotiate repayment terms and the lender’s rights in the event of default. Interest rates aren’t usually on the table, but it can’t hurt to ask.

You might also be able to arrange for more favorable terms by offering more collateral or providing other assurances of their ability to repay the loan, although this might not be ideal, depending on your situation.

Secured loans make it much easier to get a loan with less-than-stellar credit, and generally provide you access to higher loan amounts, lower interest rates, and better terms than unsecured loans.

However, an unsecured loan might be a more viable option that can provide you with more flexibility and fewer restrictions than loans that include a blanket lien.

The lender is shouldering a more significant risk by providing you with an unsecured loan, so it's possible that you’ll pay more interest than you would for a secured loan, and may not be able to borrow as much money. You’ll also need better credit and financial history to get an unsecured loan.

There are other financing options available to you besides loans, and it's important to consider all your choices. Evaluate alternative financing to determine the best fit for their needs.

By comparing your options, you can make a more informed decision and choose the financing solution that best meets your needs and minimizes your risk.

What To Do When It Comes to Equipment Procurement

While bank loan restrictions can provide lenders with additional protections and reduce the risk of default, business owners should carefully evaluate the terms of the loan and consider the potential impact on their business operations and financial flexibility.

Excedr’s leasing program is a great alternative to securing a bank loan to acquire new equipment.

Our lease terms don’t include blanket liens, debt covenants, or collateral (only the equipment itself is collateral), nor do we require equity participation (making our leases founder-friendly). In other words, you don’t need to put up any of your business’s assets in order to secure a lease agreement with us.

If you need new equipment in your lab, lease with Excedr. Our leases do not require collateral, debt covenants, or IP pledges.

Furthermore, we do not impose liens of any kind. While loans and leases serve different purposes, we believe lab equipment leasing makes the most sense for startups as they build out their operations.