Understanding the Impact of Blanket Liens in Equipment Financing
In our journey through equipment financing, we last left at the dealership, negotiating the trade-in of our delivery truck. But we hit a snag – the bank had put a lien on it as part of an equipment lease on our Digital Super Widget…
If this scenario sounds confusing, I recommend you read my previous post on the intricacies of blanket liens in the equipment financing world. …
Dealing with Blanket Liens at the Dealership
Let’s set the scene: We’re at the dealership, and we discover that the truck we thought we owned free and clear has a blanket lien on it. Now what happens?
Typically, the dealership, or whichever entity is financing your truck, needs to contact the bank to ask for permission to proceed with the trade-in. The bank’s decision will depend on the other assets your company has. For the sake of this discussion, let’s assume they grant permission. You might think this marks the end of our blanket lien issue, but unfortunately, that’s not the case.
The Continuing Impact of a Blanket Lien
A blanket lien doesn’t just cover the assets you had at the time of the Digital Super Widget lease—it also extends to future assets, like your new delivery truck. And this is where things get complicated.
The dealership was planning to give you a competitive rate, and to protect their interests, your new truck was going to serve as collateral. If you fail to make truck payments, the dealership has the right to repossess it. But here’s the twist: the bank that provided your Digital Super Widget lease has first dibs. The dealership, therefore, must either convince the bank to relinquish interest in that asset, or agree to wait their turn (“get in line”) for claims on your assets if your company goes under.
The Drawbacks of Blanket Liens in Equipment Financing
It goes without saying that the dealership is not happy about being second. So that’s going to affect the rate they give. Oops.
In my equipment financing career, I’ve seen these blanket lien lines go five, six, even seven companies deep. They all get in line for “dibs” to your assets, even assets totally unrelated to the original piece of equipment you purchased, and even future assets.
Advice for Avoiding Blanket Liens
I’ll end this the same way I did my last post – it’s better to simply avoid blanket liens altogether. Go with an equipment financing company that doesn’t use them. Then, your unrelated (and future) assets are yours to do with as you please.