Clauses like blanket liens, compensating balances, and annual requalification are common and written into almost every bank business loan. They may or may not be clearly discussed, and it’s up to the borrower to understand exactly what they are getting into. 

This brings up a simple question: “can I avoid these?”

The answer is not as simple (but it can be – you’ll understand in a minute).  

If you are insistent on using the bank, there may be no way to avoid them. I would always recommend you ask about these and insist the bank discloses them in plain English. Your loan officer might be a little surprised when you mention blanket liens, but they don’t know you read The Lease Guy so we’ll forgive them.

You can ask for these clauses to be dropped, but I wouldn’t get my hopes up. I suppose for the bank’s very best long-term, high-revenue customers they might, but even then the chances are slim. You see, these clauses are part of the bank’s normal operations – they mitigate risk on loans greatly, and this risk mitigation is one reason the bank usually offers the lowest rate. 

A better, and much simpler, way to avoid these clauses is to use a business lender / equipment financing partner that doesn’t use them. Like Crest Capital – we do not use any of these clauses. The only lien you’ll see from us is the standard lien on the piece(s) of equipment we are financing, and that’s it – the rest of your assets are just that: YOUR ASSETS. We also don’t care about compensating balances, and once we say “yes”, that’s that – we leave you alone afterwards.  

Because we don’t use these draconian clauses, our rates will be a point or so higher in most cases. So you have to ask yourself, how much is a point or so of interest worth to you? To us, it’s a no brainer. In fact, to most astute businesspeople, once these clauses are pointed out and dissected, the choice is pretty easy. 

Forgive the obvious plug, but it is what it is. These restrictions are real, they hurt, and we don’t use them. Simple as that.

If you thought the bank saying “yes” when they gave you the loan was the end of them looking at your company’s finances, think again – it’s not. Written into virtually every bank loan contract is a clause that gives the bank the right to make a borrowing company “requalify” for the loan annually. And if the bank doesn’t like what it sees, they reserve the right to call in the entire loan immediately.

That’s scary. Especially since the last two clauses we discussed – the blanket lien and the compensating balance – means they can collect immediately. They can fully take that compensating balance they insisted on, and then they can seize any of your assets to satisfy the rest. That could cripple many companies. 

The really odd part is you need not default on the loan for this to happen. You could be making all your payments on time, but if your overall financial picture degrades, the bank won’t care that they are still getting paid on time. They will instead say “you don’t qualify for this loan anymore”.

The thing is, a temporary drop in any company’s finances can happen. For example, maybe you lost your largest customer, and while your sales team is working hard to replace that revenue, your numbers are temporarily down. Or a bridge on your main road fails, resulting in an unavoidable-but-unfavorable-for-you detour. And it’s going to take six months for much of your retail traffic to return. Or a hundred other reasons revenue and profits temporarily drop. It happens – that’s business.

So imagine something “temporarily bad” like the above happens, but then the bank makes it 100x worse by calling in your loan(s). Talk about pouring when raining… 

This is why yearly requalification is such a scary bank clause. It sits there innocently in the fine print, but when it does emerge, it’s always at the absolute worse time.  

So what can you do about these bank restrictions? We’ll talk about that next.

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. 

I’m not really a salesperson at heart, but whenever I talk with a small business owner, I’m probably going to bring up equipment financing. Not so much because I want to bring another client on board (but that never hurts), but more because I truly believe in it. Equipment financing / equipment leasing are far and away the best way for any business, small or large, to acquire equipment.

Last week, I happened to be talking to a small business owner. He owned a tree trimming / tree removal company, and had been in business about ten years. In those ten years, he’s experienced success, and has grown his company from just him and a helper to about 10 people in two different crews. And in this time, he’s bought a few bucket trucks, a crane, 2 large chippers, and other equipment.

Anyway, during our conversation, he said he was looking for another bucket truck, so I handed him a card. And he looked at it and said “Is your jail better than the one I’m in now?” I was a little puzzled, and asked what he meant. He went on a five minute rant about his bank, and how he was in “bank restrictions jail”.

As it turned out, one of the things I mention here often was affecting him – when you finance equipment at the bank, they put a blanket lien on everything your company owns. So he financed a bucket truck, and later wanted to sell his crane privately and buy a new one. But he couldn’t sell the crane privately, even though he owned it outright – it was part of the bank’s blanket lien. He had to jump through all kinds of hoops and ask the warden (his words – he’s really liking the jail analogy) for permission to sell something he already owned.

Well, as you likely know, we have no blanket liens or restrictions on financed equipment, so I’m going to bust him out of jail. Let’s hope I don’t get caught!!

Hmmm, maybe Mrs. Fletch has a thing for the bad boy…

Ok, let me be honest – the bank probably doesn’t want your first born (especially if he or she is still in the diaper stage – yuck). But, the bank WILL look into cross collateral for your loan. And if you are a small business, that might mean your personal accounts.

That’s right – if you secure an equipment financing loan or an equipment lease through the bank, they will very likely put in a clause that blanket liens all of your assets “now… and hereafter acquired”. This includes personal assets, so your house, your boat, your kid’s college fund – all of those can be technically tied up with your equipment loan. So when it comes time for junior to go to college, he (and you) could be in for a big surprise if the equipment loan you took is still outstanding.

This is called cross collateral, and it’s quite common with the bank. When you take out a loan, all of your personal business and assets can be tied up in the legalese. And since it’s in legalese (and also in 6pt font), you may not really be aware of this. But yea, they get tied up, preventing you from borrowing, selling, or otherwise using these assets without the bank’s specific permission. Now, will they keep junior out of college? Well, we hope the bank isn’t that evil, but then again, why take that risk?

Contrasting this, an equipment financing company (like mine) will file one UCC financing statement on the specific asset we are financing. If your kid’s college fund isn’t on there (and we’re really not interested in that anyway), you are free to do what you wish. In other words, we don’t care about your other assets, and will leave you (and junior) alone. He’s free to go to college and attend all the keg parties he wishes (not that ol’ Fletch would know anything about that, mind you – I studied all throughout college. Indeed I did.)

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.)