Deep Blue Publications Group: In Small-Business Lending, the Devil Is Often in the Lien


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.