Awhile back, I posted about interest rates on loans and credit cards and such, and cited collateral as one of the influencers of interest rates. In general terms, I said the better the collateral, the better the interest rate (which is why credit card rates are so high – the collateral is terrible.)
But there’s something I wanted to point out in regards to collateral, equipment financing, and bank loans, and that’s something called “blanket liens”. They are quite common, and can really lead to trouble down the road if you are not careful.
A lien is essentially a right to a specific piece of property. If you put up your building as collateral on a loan, then there’s a lien against the building. Typically, this is no big deal – assuming you pay back the loan, there will be no issue. But, and this is important: you can’t do much with the building with the lien against it. Including using it as future collateral.
A “blanket lien” doesn’t list specific pieces of collateral. Instead, it assumes a lien against ALL of your assets. Typically, the wording for this is ultra confusing, and buried in the fine print. Trust me, by the time you get to the passage that includes your first born as collateral, your eyes will glaze over (that’s the plan.) So you clear your eyes, sign on the dotted line, and four years later, you go for another loan, only to find your first equipment financing loan has all of your collateral tied up in the blanket lien. Oops.
So do yourself a favor – make sure that you fully understand what collateral you are putting up when you go to the bank for equipment financing (or anywhere else, really, although most equipment financing companies don’t utilize blanket liens, because it kills further equipment financing business. We don’t want your first born anyway… way too expensive to feed.)