Accepting a business loan could put you at risk of having a lien filed against your company. In some instances, you’ll find yourself willing to accept that as the cost of doing business. But failing to pay debts on time could wind up costing you your business.
This article introduces you to business liens and how to avoid them.
What Is a Lien?
A lien is a legal instrument allowing someone to state a claim to your property or assets. This can occur when you default on a loan or don’t pay bills on time.
If you’re a business owner who borrows money, you’re at risk of liens. You must repay loans according to the lender agreement or face property repossession. Unpaid debts could result in corporate liens.
How Do Liens Work?
The nature of a lien determines how it works. Liens originate in one of two ways—voluntary or involuntary. Here’s how they each work:
Voluntary Liens
Voluntary aka consensual liens are claims placed on property bought using a loan. This lien type ensures the financing institution recoups its total loan amount. If you don’t pay on the loan your property can get repossessed by the lender.
Examples of voluntary liens are those on a vehicle or building purchased using a loan. If you default on either loan the lender can claim ownership of specific property.
Involuntary Liens
Involuntary liens occur when a company doesn’t pay its bills. These liens get enforced by court order and for the amount owed. Involuntary liens become part of your business records and prevent your sale of assets.
Examples of involuntary liens include claims for unpaid taxes or payments to contractors. A company must disclose an existing lien. And having a lien could interfere with the sale of your business.
Should you pay contractors up front be sure to request lien waivers. They’re your receipt to protect you from unwarranted claims. Lien waivers prove you paid in full for all goods and services provided by another company.
Types of Business Liens
Some liens are unavoidable when doing business unless you pay cash for everything. But unexpected business liens could shut your doors for good.
Tax Liens
As a business owner, you’re given ample opportunity to pay your property tax debt. If that doesn’t happen by a given deadline you’ll face government tax liens. The government can levy your real and personal property and assets for failure to pay taxes.
Mechanic’s Liens
If your business doesn’t pay a contractor for work completed they can file a mechanic’s lien. If this is the case, selling your business becomes impossible for you. But a creditor could force the sale of your property to pay outstanding debt.
Judgment Liens
Your business may encounter judgment liens from creditors or customer lawsuits. Judgment liens don’t prevent the sale of property and assets. But proceeds must go towards paying claims first.
Protect Yourself Against Business Liens
The best way to protect yourself against business liens is to pay debts on time. Business liens can hinder your company’s growth. They could also interfere with your plans to sell the business.
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