Most of us will have to deal with liens at some point in time or another. If you’re a homeowner with a mortgage, you almost certainly have one now. However, unlike liens associated with homes, some liens can be quite damaging and impact your business’s ability to grow and succeed.
On this page, we’ll dig into how liens work, various types of liens, how they impact you, and what you can do about them if they’re impacting your business.
What is a Lien?
Liens give a company or person legal claims to another person or company’s property. They’re often used when a lender wants to ensure they receive payment from a debtor. It gives the creditor recourse if the debtor doesn’t make good on his agreement to pay.
If you’ve heard the terms “secured debt” and “unsecured debt,” the difference is the lien. Secured debt has a lien and is secured by an asset.
How Does a Lien Work?
Because a lien grants someone else interest in your property, you generally cannot transfer property with a lien to another party without the lien holder’s permission. Liens can also impact your credit score and access to credit.
Beyond this, how it works depends on the type of lien. There are three broad categories: consensual, statutory, and judgment.
When you voluntarily agree to a lien, it’s called a “consensual lien.” These are quite common with personal property, such as mortgages and auto loans.
In the case of a home, the property serves as collateral and the lienholder, or mortgage company, has the legal right to liquidate the property if the property owner does not make payments.
Consensual liens are visible on credit reports, but they don’t have a negative impact unless you fail to make your payments.
Sometimes a lien is implied by or created by operation of law and does not require your consent. This is a statutory lien.
For example, if you pay a warehouse to store your goods and don’t pay for the storage, the warehouse owner can liquidate your goods or take other actions depending on what your state allows.
Statutory liens reflect negatively on your credit report because they signify an unmet financial obligation and can stay on your report for seven years.
Sometimes a court steps in and grants a financial interest in business or personal property, giving lien holder status to a third party. This is referred to as a judgment lien.
This might be the case if someone filed a slip-and-fall lawsuit against your business, the plaintiff won, and your insurance doesn’t cover the full damages awarded. It’s common with car accidents too.
Judgment liens are often considered the most severe and also reflect negatively on your credit. They’ll stay on your credit report for seven years.
Liens and Bankruptcy
Liens against you or your business can impact bankruptcy proceedings because they involve repayment of debt and secured loans.
Many liens can be discharged in bankruptcy, meaning you do not have to pay creditors back. However, government liens, such as tax liens, are usually exempt from this. You’ll be required to pay the debt back even if you file bankruptcy. If you’re unsure whether this or any information outlined on this page applies to you or you have additional questions, be sure to contact an attorney or financial advisor who specializes in liens.
Different Types of Liens
Within each of the three broad lien categories, there is a multitude of lien types. A few of the most common that impact business owners are outlined below.
Bank liens are a type of consensual lien. They’re put in place when you take out a loan to purchase an asset, such as a vehicle or major equipment. In these cases, ownership and control of the property remain in your hands as long as you make the agreed-upon payments, and the lien is removed when your loan is paid in full.
Real Estate Lien
Real estate liens give a third party the legal right to seize and sell real estate property when a contract is not filled. Most real estate liens are consensual, as is the case with a mortgage. However, some are placed when a creditor is not paid and may be judgment liens instead.
Mechanic’s liens are a form of statutory lien. They’re placed when a mechanic or contractor is not paid for work performed and grant the individual financial interest in the business, vehicle, or home in which the work took place.
Tax liens are another form of statutory lien. They’re often placed by the Internal Revenue Service (IRS) for non-payment of federal taxes but can be placed by any tax authority. Tax liens can impact homes, vehicles, banks accounts, businesses, and business assets. That means if your business owes taxes and a lien has been placed, the IRS has an interest in your receivables too. Therefore, many businesses turn to factoring to finance an IRS lien.
Can a Lien Be Removed?
Liens can be removed in two ways.
1. Contest the Lien in Court and Prove That it’s Invalid
If the lienholder cannot prove that their lien is valid, the court will remove it.
2. Have the Lien Voluntarily Removed
Sometimes lienholders will voluntarily lift a lien or remove restrictions if the lien is impacting your ability to pay them back. You may also be able to negotiate a pay-off amount to clear a lien immediately. However, more often than not, a lien is removed when the related debt is paid off.
Ways to Avoid Liens
Not all liens are “bad” and harm your credit or business, but it’s best to avoid having them placed whenever possible. Thankfully, there are many ways to avoid liens.
Don’t Take on Debt
Pay in cash whenever possible. If you’re experiencing a cash flow shortage or need a quick injection of working capital, look for debt-free ways to get funding such as invoice factoring.
Avoid common cash flow mistakes such as focusing on profit over inflows and plan for your slower seasons to ensure you can keep up with payments.
Manage General Contractor Relationships Carefully
Sometimes payments don’t trickle through from general contractors to subcontractors and result in a mechanic’s lien. Vet the payment histories of your general contractors carefully, pay on time and in full. Consider requiring payment bonds from general contractors and/or issuing joint checks that require signatures from all receiving parties. You may also have general contractors collect conditional lien waivers with pay applications. If your state allows it, you can file a notice of completion too.
Boost Your Working Capital with Invoice Factoring
If your business needs a quick cash injection to keep up with payments, you’re trying to pay off debt related to a lien, or you simply don’t want to take on debt, invoice factoring can help. Factoring offers immediate payment on your B2B invoices, so you’re no longer tied into 30, 60, or 90-day waits. To get started, request a complimentary rate quote.
- Tips on Valuing a Small Business When Buying or Selling - August 20, 2021
- What Are Liens and How Do They Work? - July 23, 2021
- 6 Business Growth Strategies for Successful Small Businesses - June 25, 2021