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Liens: The Sleeping Giant Jeopardizing Turnaround Financing

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Due Diligence

By Jim Newman, Loeb Term Solutions

Liens, in and of themselves, are neither bad nor good; they just are. When a company needs financing or refinancing, the new lender will always run a lien search and find exactly what liens are currently encumbering the company assets.

Over the past year, Loeb Term Solutions funded approximately 30 companies, and in the process cleaned up the UCC liens on file against nearly all them. Most of those clients treat their lien files more like a "sleeping giant" that only awakens once they seek financing or refinancing. Potential new lenders will always run a search to find liens that are currently encumbering a company's assets, and a long lien cleanup process can slow up the refinancing at a time when its imperative things move quickly.

As an example, during the recent due diligence performed for a client seeking funding, the following outstanding liens were uncovered:

  • A judgment lien for an old, unpaid insurance premium
  • Two judgement liens from unsatisfied vendors looking to recoup back payment
  • Liens tied to back tax issues

The client was completely unaware of the outstanding liens. As such, the cleanup and subsequently the funding processes took longer than usual. Typically, clients with clean Uniform Commercial Code (UCC) files can expect financing within a three-to-four week timeline, while clients with outstanding liens typically take five-to-six weeks to secure funding.

Another recent funding involved eight liens that needed to be cleaned up before funding could be even be considered. It took about two months of due diligence and working closely with the client to resolve six of the liens and only have two remaining. Those two liens were for fixed dollar amounts and in order to close, the client and the borrower agreed to put those funds into a reserve account. The funding took place and once the client cleaned the last two liens up independently, the additional funds held in reserve were then released.

The cleanup process itself can take as little as 10 minutes, if the lien holder agrees with you that the existing lien is inappropriate. If a lien is older than a few years, there can be issues in getting such an agreement or even tracing down the lien holder and without their permission it is impossible to clean up the lien.

Costly delays in financing can be avoided entirely if the client does preemptive due diligence or regular fiscal checkups. After all, it's considered standard to check in regularly with a dentist, doctor, or auto mechanic. Why wouldn't a company need to take the same approach with understanding the big picture regarding their financial health, especially if it means avoiding delays or problems when the time comes for them to seek funding or even to sell the company? One ounce of prevention will ensure a financially stronger and healthier business loses no time when funding is needed.

Don't jeopardize future funding turnaround by giving liens the "sleeping giant" treatment.

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For informational purposes only; content does not constitute legal advice.

This article was originally published on September 30th, 2015 by Loeb Term Solutions – www.loebtermsolutions.com 
Republished with permission.

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