During the first part of this article we tackled debt, its types and also discussed the things that a borrower undergo before completing a loan process. But what if you’re not able to pay your lender? Here is the second part of my article about debt and today we’ll talk about liens and how it affects businesses.
What is a Lien?
A Lien is a financial obligation that is being filed by lenders to ensure that they may seize something ( like personal property etc.) once the debtor would not be able to pay a specific loan (or debt) in a scheduled time.
Here is where a lien comes in: A lien will be filed to you by the lender (acting as the holder of the lien). It will be served as a legal claim, notifying the state and the business itself stating that once you are not able to pay the debt, means that they can take any business assets from you as collateral.
There are times that borrowers would voluntarily place liens to their property and once they fail on paying, this is where the lender comes in and seize the property. Other types of liens are judgment lien, mechanic’s lien and tax lien, where the IRS puts a lien to your property if you cannot pay income taxes.
Once there’s a lien in your assets, the lender might require you to pay in full, which is a bad hit to your business, and most of all it may also affect the receivables and your cashflow.
Liens by Priority
When the debtor failed to pay the debt (defaults the loan), the first lien (principal lien) will be the one who’ll be seizing the assets of the business, while the lenders of secondary loans etc. are in a bigger risk since they come with a much higher interest.
With Great Loan comes Great Responsibility
Flickr (SherryK Cash)
The lien holder is the one who will be responsible for removing the lien of your asset. So for the lien to be removed, you must pay your debts in full and thoroughly comply with all the terms of the lender.
As a startup, especially for those who wanted to raise capitals with the use of loans from banks, you should always be aware of these kinds of security interests. A debt will always be a debt at the end of the day. It would not be easy to avoid these kinds of circumstances, what matters is that you have the discipline on handling your finances, and proper planning on how to take and pay.