October 23, 2013
By Bob Coleman
Editor, Coleman Report
New York Small Business Lending Blogger Ami Kassar posts an excellent blog about lien knowledge from the borrower’s standpoint.
However, the article is equally as important to lenders. Especially for SBA lenders who contract with SBA exactly the UCC collateral position of the loan.
“Naturally, lenders prefer to be in the first lien position. If a lender does take a second or third lien position, the loan is riskier — and often requires a much higher interest rate. And that is why paying attention to the lien is critical. When you give up first lien position on some or all of your assets, you really want to make sure that you are getting the money you need at the right price — because subsequent loans are likely to be either more expensive or impossible to obtain.
“Unfortunately, many small-business owners don’t pay attention to this.
“My loan brokerage firm recently helped a rapidly growing client that had outgrown its line of credit with a bank. It was growing fast, but it was not profitable enough for the bank to extend more money. Instead, the company chose to take money from an accounts receivable factoring company. We made our client aware of the higher cost associated with factoring, but given the company’s relatively high margins and growth prospects, the owner was willing to pay the higher price for faster access to capital.
“But as we moved toward closing, we were surprised to learn that the company had entered into a purchase-finance agreement for a small piece of equipment a few months earlier, and the equipment seller had placed a blanket lien on all of our client’s assets, including its receivables. Without removing this lien, the transaction could not proceed because the factor, understandably, insisted on being in the first position on the asset they were lending against. Much to our surprise, the equipment company would not agree, and the client had to make the difficult decision to pay off the equipment loan with proceeds from the factoring agreement at a much higher rate and on less favorable terms.
“I hope that these examples convey how critical it is to think through the lien and collateral requirements of your lender to make sure that when you’re giving up first lien position on some or all of your assets, you’re getting the best possible loan return.”