Lien & Security Interests
“Titled to You, Tagged by Them.”
A lien is a legal claim a lender (or creditor) places on an asset to secure repayment.
It gives the lender the right to take or sell the asset if the borrower defaults.
Think of it as: “You get the money. We get dibs on the asset until you pay us back.”
A security interest is the lender’s legal right in the borrower’s property (collateral).
It must be granted by the borrower and then perfected to be enforceable against other creditors.
Granted = The borrower signs a security agreement giving the lender rights
Perfected = The lender makes the interest publicly known (usually by filing a UCC-1 form)
Perfecting a lien makes the lender’s claim legally enforceable against third parties (like other lenders or buyers).
Without perfection, a lien may not be valid if others claim the same asset.
Most common method: Filing a UCC-1 financing statement with the Secretary of State (in the business’s home state)
Types of Collateral That Can Be Secured
| Asset Type | Example Collateral |
|---|---|
| Inventory | Goods held for resale |
| Accounts Receivable | Customer invoices owed |
| Equipment | Machinery, vehicles, tools |
| Real Estate | Buildings, land |
| Intellectual Property | Patents, trademarks |
| Cash or Deposits | Bank accounts (less common) |
Priority Matters: First In, First Paid
In a default situation, lien priority determines who gets paid first.
First to perfect = first in line
Unperfected = last in line (if at all)
This is why lenders care deeply about:
Filing dates
Subordination agreements
Cross-collateralization
Competing claims
Considerations for Business Owners
- Pledging assets gives you access to credit — but it limits your freedom to sell, lease, or borrow against those assets.
- Granting multiple liens can lead to conflict or default.
- Selling a business or asset? You’ll need to clear any liens first.
Red Flags & Risk Points
- Overlapping liens on the same asset
- Borrowing from multiple lenders without disclosing existing liens
- Misunderstanding what’s already pledged (especially in blanket liens)
Common Lending Lien Types
Type | Description | Use Case |
Blanket Lien | Covers all business assets, now and future | Most bank loans & lines of credit |
Specific Lien | Secures a single asset (e.g., a truck or machine) | Equipment financing |
Purchase Money Security Interest (PMSI) | Lien on asset being bought with loan funds | Inventory or equipment purchases |
Subordinated Lien | Lower priority than another lender’s claim | Venture debt, mezzanine financing |
How Real Estate Is Secured (It’s Not a UCC Thing)
While most business assets (like inventory, receivables, or equipment) are secured using a UCC-1 filing, real estate is a whole different game.
🧾 Here’s How Real Property Is Secured:
Term | What It Does |
Mortgage or Deed of Trust | Gives the lender a lien on the property |
Recorded At: | County Recorder’s Office (not Secretary of State) |
Shows Up As: | A public record against the property title |
Filed By: | The lender, usually during or after loan closing |
Priority Based On: | Recording date — first recorded, first paid |
Key Points for (real estate) Borrowers
- Not a UCC lien: Real estate liens are recorded locally, not statewide
- Title search required: Before buying, selling, or refinancing real property
- Can block a sale or transfer until released or satisfied
- If it’s land or a building — it’s locked down at the county, not through UCC.
Final Thoughts
Liens and security interests are the legal backbone of business credit.
If you’re borrowing against assets, make sure you know:
What’s been pledged
What’s been perfected
Smart borrowers stay “lien-aware”, because ownership isn’t the same as control when debt is in play.
Seriously consider Legal Advice/Attorney Involvement if you’re:
- Signing a loan agreement with collateral requirements
- Being asked to pledge specific or all business assets
- Unsure what’s already been secured or filed
- Planning to sell or transfer assets that may be encumbered
- Disputing lien priority or facing competing creditor claims
- Leasing, buying, or refinancing real estate with existing liens
A few words from a lawyer now can save you big headaches later.
Lien mistakes can tie up deals, trigger defaults, or cost you your most valuable assets.