By Chris Fletcher
Let’s meet John. John owns a tree cutting service in Pennsylvania. He took it over from his father about 20 years ago, and over the years, built the business to be the largest service in the area. On any given day, he can have two to three crews working, and owns several pieces of expensive machinery, including two bucket trucks; a large crane; dump trucks of various sizes; woodchippers; stump grinders; chain saws in any size, shape, and color you like. And more.
About a year ago, John took out a bank loan to buy a new crane. When he got his new crane, he decided to sell his old one privately. A buyer emerged, a final price was negotiated, and the deal was about to commence. But then a startling fact was discovered: John wasn’t allowed to sell his old crane, even though he owned it free and clear for years.
Why did this happen? Because when John bought the new crane, buried in the fine print of his loan agreement was a blanket lien. If you don’t know what a blanket lien is, it’s exactly what it sounds like: it’s a lien that blankets an entire business. Every company asset is affected by this blanket lien. Even future assets are affected by it. The bank legally had claim to the old crane, and John needed their permission to sell it.
You read that right. Permission must be given for John to sell something he owns outright. And that permission may or may not be granted. That’s how a blanket lien works. The end result of all this was the sale did not happen, and John is stuck with an old crane he doesn’t need.
To protect all identities, John’s name and details are changed in this story, but this is an easy situation to picture, isn’t it? And it’s very common in buying and selling business equipment.
Blanket liens are popular with many lenders
Many lenders, including almost all banks, embrace the blanket lien. There are probably a variety of reasons for this. The obvious one is it gives them immense protection against loan default, because it virtually ensures there is recourse if the equipment loan is not paid back. If repossessing the equipment isn’t “enough” to satisfy any outstanding balance (and let’s face it— with depreciation, it almost never is), there are other assets to go after.
This is why John couldn’t sell his old crane—the bank wanted that (and everything else John owns) on standby in case John defaulted on the loan for the new one.
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Here’s another layer to this: a blanket lien will follow John’s assets, and remains a legal minefield that can be very perilous for a buyer as well. For argument’s sake, let’s say John sold his old crane privately for cash. No loans, no digging into paperwork, no nothing. Nobody may even be aware this crane has a blanket lien attached to it. However, if John defaults on his new crane loan, the bank will come looking, dig through the paperwork and say, “Where’s the old crane?” John will say, “Oops, I sold it privately. I didn’t know.”
So the bank can legally go after the old crane, and will pay the buyer a visit. And John’s buyer can argue, produce a receipt, a bill of sale, etc.—none of that will matter. The law will side with the lienholder. The buyer of John’s old crane can actually lose the crane to the bank and will have no recourse at all. Sure, the buyer can try and get their money back from John, but remember, all of this was put into motion because John defaulted, so good luck there.
Why blanket liens exist
Blanket liens are one reason why banks can offer the lowest rates. Since rates are generally arrived at via the amount of risk a lender is willing to assume (lower risk equates to lower rates), a somewhat draconian restriction like a blanket lien lessens risk immensely. But at what cost to the business owner? When you can’t sell assets you own outright, well, that’s a problem, regardless of the lowest rate.
I’ve been around the equipment-financing business long enough to speculate on other reasons why banks love blanket liens. In my opinion, one of the other reasons is restrictions like blanket liens keep customers in the fold. If all your assets are tied up with the bank, you may as well get your next equipment loan from them as well.
It becomes a bit of “the devil I know” syndrome. I’ve spoken to enough small business owners who say things like “I can’t stand my bank’s restrictions and liens, but what am I going to do? They’re my bank.”
What are you going to do indeed?
What can you do about a blanket lien?
The most obvious thing you can do as a small business owner is insist that your bank not include the blanket lien clause in any of your equipment loan contracts. But the truth is, this probably won’t work. Unless you’re someone with enough financial clout to push the bank around, they aren’t likely to drop that clause.
A better solution is to find a lender that does not use blanket liens, but still has strong, competitive rates. They do exist. Just search Google for equipment financing companies, and check their websites as to whether they use blanket liens—they’ll usually state such right up front.
These lenders will secure the equipment loan by only using the equipment itself as collateral. This means a bit of an increased risk, so they may charge a point or two higher than the bank. But many businesspeople feel it’s worth it, because it frees them from restrictions like blanket liens, and allows them full flexibility in what they do with the other assets they own.
In other words, there are equipment lenders out there who would be just fine with John selling his old crane. Because after all, it is his to sell.
RELATED: How a Risky Financing Strategy Paid Off for One Entrepreneur
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