We’re talking about lending restrictions in 2024, and first up is the notorious blanket lien.
First let’s talk about liens in general. In business/lending, a lien is when a lender claims the right to property belonging to the borrower until the debt owed by that borrower is discharged.
The mainstream talk on liens is usually related to vehicles. You don’t pay your car loan, and your car gets repossessed. And you cannot sell your car until the loan is paid off, and the lender discharges the lien. And of course, you should never, ever buy a car with a lien on it.
But liens can extend to any piece of tangible equipment. Very often, if you borrow money to buy a piece of equipment, the piece of equipment itself will have a lien on it. And that’s expected and fair.
But what a blanket lien does is it blankets your entire company with a lien. This means everything your business owns has a lien on it. So if you borrow money from the bank to buy, say, a new delivery truck, they will put a blanket lien on your company so everything your company owns will have a lien on it. Not only can you not sell that new delivery truck, you can’t sell the old, long-paid-off one either. You also can’t sell any machinery, tools, or anything else.
Technically, you can’t even give anything away. Maybe you want to give your old office computer to your nephew… better check with the bank first. Because legally, they have the rights to that computer. I’m not saying they would deny that, but that’s not the point: legally, they can.
Blanket liens are pretty cut and dried, and very enforceable. They also smother your company because you cannot sell anything without the bank’s permission (and no astute buyer will buy anything with a blanket lien in place). This severely restricts your finances and your flexibility.
It’s always my standing recommendation that you avoid lenders who use blanket liens altogether. But if you must use a particular lender who employs them, try and negotiate that clause away (it’s probably futile because it’s rock-solid protection for the bank, but you can ask.)
Next up – compensating balances.