What is a Corporate Lien
A corporate lien is debt owed to another business, or can be back taxes owed to the government. The corporate lien is placed on the company's assets to record that the company has outstanding financial obligations, which is of importance to shareholders and potential buyers.
Breaking Down Corporate Lien
Corporate liens are just one type of lien in both the personal and corporate lending markets. For example, when a bank finances a personal automobile loan, they hold a lien on that automobile securing the loan should it not be paid back in full. The core purpose of a lien is to guarantee a loan. In the event the loan is not paid off in full, the creditor may take possession of the asset that the lien secures, in this case the automobile. A lien is essentially a form of collateral, where a borrower puts up something of value they own in exchange for securing new credit.
Liens are also used for company debt. If a company cannot meet its obligations, investors can purchase the corporate lien and settle on their own with the lender. Examples of this are most often seen in the area of unpaid back taxes, where a company suddenly must pay large amounts in back taxes, plus penalties. In these cases investors may step in an effort to prevent bankruptcy and to negotiate new lending terms. Should the company declare bankruptcy, holders of the corporate lien are likely to be given priority over others waiting in line to be repaid, including stockholders.
There are instances where more than one outstanding lien will be in place with a business. If the business fails, the order of the lien holders matters greatly in terms of who will get paid back. Lenders are less likely to take on risk with second and third lien positions as a result.
Business Purchases and Corporate Liens
Just as with a piece of land one might be interested in purchasing, a buyer of a business needs to perform due diligence in assuring there are no outstanding liens held against the company. The last thing a buyer of any property or asset wants is to discover after the sale has closed that they have inadvertently taken on third-party debt.
The good news is there are publicly available databases for potential buyers to search for any outstanding liens. There are three kinds of searchable liens available to the public. The first is a UCC lien, which is filed with the Secretary of State’s office in most U.S. states. Tax liens are also typically filed in the state of the company’s legal headquarters and will show any liens placed against unpaid back taxes. Lastly, judgment liens are filed when a legal judgment has already occurred; these judgments are most often filed in local county courthouses.
When buying a business, it is important to hire someone who is familiar with these types of lien searches to avoid any post-sale surprises.