Deep Blue Publications Group: In Small-Business Lending, the Devil Is Often in the Lien
By AMI KASSAR
Searching
for Capital
A
broker evaluates the small-business financing market.
When small-business
owners plan to acquire business capital, the usual primary issues expected
would be: How much is the interest rate? What is the size of the loan? How much
are the monthly amortizations?
But another concern hides at the back, more often than not,
and gets neglected. What collaterals will the lender require and what will that
mean to the owner’s capacity to borrow in the future? At times, the answers to
these questions can be adversely critical.
When a lender submits a lien, it gives the lender the
potential to acquire a borrower’s assets in the event of non-payment.
Occasionally, additional liens are provided by other creditors in line with the
lender’s initial lien — but these creditors take subordinate positions and
would be able to avail of proceeds in a liquidation only when the holder of the
first lien has already been paid off.
Obviously, lenders would opt to be in the first lien
position. If a lender does take a second or third lien position, the debt is
more unstable — and usually involves a much higher interest rate. Hence, paying
very close attention to the lien is vital. When you surrender a first-lien
position on some or all of your assets, you certainly want to guarantee that
you are getting the money you need at the right price — because additional
loans tend to be either higher-priced or very difficult to acquire. Regrettably,
many small-company owners do not take this issue seriously.
My loan brokerage company recently assisted a fast-growing
customer that had overreached its credit line with a bank. It was growing
rapidly; but it was not viable enough for the bank to provide additional funds.
Instead, the company opted to acquire money from an accounts-receivable
factoring firm. We informed our client of the higher cost related to factoring;
but considering the firm’s comparatively high margins and growth potentials, the
owner was open to shouldering the higher cost for faster release of capital.
Within the procedure of establishing the factoring
relationship, we learned that the company’s present lender had put a blanket
lien against all assets of the firm, including the accounts receivable. We
consulted with the customer to assess the avenue of utilizing some of the
proceeds of factoring to cover the outstanding bank credit line. The factoring
arrangement was still reasonable, and our client negotiated to settle the existing
line of credit at closing, at which point the bank would take out its lien on
the receivables, to be substituted by a fresh lien owned by the factoring firm.
But as we approached closing, we were stunned to learn that
the firm had entered into a purchase-finance deal for a small equipment item
several months previously, and the equipment seller had put a blanket lien on
all of our client’s assets, including its receivables. Without removing this
lien, the deal could not progress because the factor, obviously, insisted on
having the first position on the asset they were attaching with the loan.
Surprisingly, the equipment company would not give in, and the customer had to
make the hard decision to settle the equipment loan with funds from the
factoring contract at a much higher rate and on less affordable terms.
We are also presently trying to assist a borrower that is
running two franchises and plans to initiate a third. Thus far, this small
franchisee has coped to prop its business with just a single loan – a
relatively small Small Business Administration loan for the purpose of buying a
trailer truck for its events.
While the loan covered merely 20 percent of the amount
needed for the new site, the business was now stalled because the new lender
required a blanket first position lien, which the Small Business Administration
would not agree to. In this case, the customer is liable to refinance its
equipment at a higher rate with a lender that will take a lien only on the
equipment and allow the business to pursue its business expansion.
Hopefully, these illustrations will exhibit how vital it is
to consider seriously the lien and collateral requirements of your lender to
assure yourself that when you are giving up first lien position on some or all
of your assets, you expect the highest possible loan benefits.
Have you ever gotten entangled by a lien? Let us know your
story and how you handled the situation?
Ami Kassar established MultiFunding, which is based near
Philadelphia and assists small companies who seek the appropriate sources of
funding for their business needs.
