Blanket Lien Definition
A blanket lien is a type of line that gives a lender the legal right on all assets used as collateral for a defaulted loan. In the event of a debtor defaulting on the terms and repayment of a loan, a blanket lien can be exercised by the lender. This lien gives the lender the right to seize assets used as collateral for the secured loan.
A blanket lien is otherwise called a UCC-1 lien, this gives lenders maximum protection in the event that a debtor defaults. Lenders who seek to enjoy the blanket lien coverage or protection must secure the loans they offer by backing the loans with collateral.
A Little More on What is a Blanket Lien
There are many types of liens provided by the Uniform Commercial Code (UCC), treatments and features of liens are contained in Article 9 of UCC. regardless of the type of lien, the assets used as collateral for loans seized in the event of default by the debtor. While a blanket lien offers maximum protection to lenders, default borrowers do not enjoy any form of protection because they can eventually lose all the assets they used as collateral for the loan. In the case of a blanket lien, a lender has the right to seize all the assets used as collateral for the loan if the debtor fails to repay the loan as contained in the credit agreement.
Good Lien Agreement Practices
On many occasions, “all assets” as stipulated in blanket liens have been challenged in court due to certain ambiguities contained in Article 9 of UCC. Due to the cost and stress of going through legal suits based on what a collateral is and what it is not, both the creditor and debtor in a loan agreement are advised to get an attorney when reaching a credit agreement. The attorney would guide them on possible assets that can be used as collateral for the loan and the lien agreements for the loan. Not only does this save both parties court cases and arguments, but it also provides a clear understanding of the lien agreement.
Reference for “Blanket Lien”
Academics research on “Blanket Lien
[PDF] Measuring LGD on commercial loans: an 18-year internal study, Araten, M., Jacobs, M., & Varshney, P. (2004). Measuring LGD on commercial loans: an 18-year internal study. RMA JOURNAL, 86(8), 96-103.
Accounts receivable management policy: theory and evidence, Mian, S. L., & Smith Jr, C. W. (1992). Accounts receivable management policy: theory and evidence. The Journal of Finance, 47(1), 169-200. This paper develops and tests hypotheses that explain the choice of accounts receivable management policies. The tests focus on both cross‐sectional explanations of policy‐choice determinants, as well as incentives to establish captives. We find size, concentration, and credit standing of the firm’s traded debt and commercial paper are each important in explaining the use of factoring, accounts receivable secured debt, captive finance subsidiaries, and general corporate credit. We also offer evidence that captive formation allows more flexible financial contracting. However, we find no evidence that captive formation expropriates bondholder wealth.
Current Techniques for Secured Financing of Negotiated Acquisistions in Mexico, including Analysis of Effective Use of Guarantee Trusts and Pledges without …, Caviedes, H. P. G. (2005). Current Techniques for Secured Financing of Negotiated Acquisistions in Mexico, including Analysis of Effective Use of Guarantee Trusts and Pledges without Possession. US-Mex. LJ, 13, 71.
Revolving asset-based lending contracts and the resolution of debt-related agency problems, Constand, R. L., Osteryoung, J. S., & Nast, D. A. (1991). Revolving asset-based lending contracts and the resolution of debt-related agency problems. Journal of Small Business Finance, 1(1), 15-28. Small firms that do not have access to organized financial markets must often rely on secured commercial loans for their debt financing. In large firms, debt-related agency problems are often resolved through the bond pricing process in the formal debt markets. When these same debt-related agency problems arise in small, private firms, the structure of the secured lending agreement must resolve these problems. This study identifies debt-related agency problems as they exist in private firms and examines howf the lending agreement resolves these problems.
Is secured debt efficient, Hill, C. A. (2001). Is secured debt efficient. Tex. L. Rev., 80, 1117.