A business lien is a security interest that creditors have in a business due to unpaid debts. The creditor can place a lien on the business assets, preventing them from being sold without receiving payment for the balance owed on the debt. A secured interest is one in which creditors place a claim on assets. A business lien is a secured interest, and not an unsecured interest where the claim is against the business owner in general. Two major types of business liens are a judicial lien and a consensual lien.
When a court judgment results in a lien on business assets, a judicial lien is created. The court case does not have to be related to business activities for the plaintiff to attach the business assets. For example, if a plaintiff slips and falls at the home of a business owner and the homeowner’s insurance policy is not sufficient to pay for all the medical bills, then a judge can grant a judicial lien to the plaintiff to cover the difference if she wins the case. The defendant can pay the damages, but if he is unable then the plaintiff can execute the judgment and gain possession of the assets.
A consensual business lien is one in which the business owner consents to the lien. A common example is when the business owner is given a loan, as in the promissory note, and grants the creditor a security interest in the business assets. The business owner has a right to use and possess the assets, but he cannot sell or transfer the assets because of the creditor’s interest. If the business owner defaults on the loan, then the creditor can use the legal system to take possession of the assets that are secured by the loan. Some types of assets may be protected according to local laws, such as a home that is also used for a business.
One of the disadvantages of buying a business with a lien is that it becomes a historical part of the business background. It can impact the ability of someone who wants to buy the business to obtain funding from investors and partners. When negotiating the purchase of the business, it’s important that the purchase agreement contain some language that warrants that the business is free and clear of any business liens. It’s also up to the individual buying a business to conduct his own search where public records are kept of any liens filed by creditors. Failure to do so often leads to costly legal battles to void the purchase agreement or receive money for damages due to the lien.
In many jurisdictions, creditors often have the right to seize assets and sell them after following the appropriate court proceedings. Individuals who want to buy a business often conduct a business lien search before investing in it. They risk losing some or all of the business assets if they purchase a business that has a lien attached to it if they don’t.