How to Use an Asset with a Lien to Get a Business Loan

Do you want to get a business loan using assets with a lien?

 How to unlock your Assets!  Here are 3⃣ ways to use an asset that has a loan on it now as collateral for a new business loan.

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1. Request a lien release. 
2. Lender takes a 2nd lien position
3. Payoff the lien with proceeds. 

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3 Ways to use an asset with a loan on it as collateral for a new loan. 

1. Ask for a release of lien:

Call the existing lien holder and ask them to release the lien.    Lenders often take much more collateral than they need because they want to cover any losses on defaults.  They sometimes even take all of a business’ assets instead of only they need.  They over collateralize the loan.   Most borrowers think that is only way it will be and do not object.   The lender wins by default just by asking for more than they deserve.   

The lender may agree to release a certain piece or more of the collateral they are holding.  This works best when they have many pieces of collateral and you have already paid a lot of the loan down with timely payments. 

Push the lender hard on loans you have paid down significantly as agreed.   

Negotiation Example:  2 years ago, you took out a 4 year business loan for $100,000 and your current balance is $40,000.   The lender took 4 pieces of construction equipment worth $25,000 each and all payments have been on time. 

Telling the loan company they still have enough collateral  and maybe more than when the loan was originally closed.

The loan to value, LTV, may now be lower than when the loan closed.    In those cases, you have paid the loan loan down faster than the equipment depreciated during that time.

If they agree, follow up to verify your asset has been released at the Secretary of State, also known as the SOS.    Push hard to get a release as you may need the extra collateral, especially for a larger business loan.

2. New lender takes a second position. 

They can take a 2nd position lien on the collateral.

This works best with real estate that has a lot of equity in it.  The new loan provider can be the 2nd lien holder against the Real Estate.

Example:  A first position lender has a lien on commercial real estate.   The property is worth $500,000 and the current balance is $100,000.   The new lender makes a loan for $50,000 and then takes a 2nd lien on the property behind the 1st lien holder.   2nd and even 3rd positions are usually limited to real estate or cash flow financing.

3. New loan proceeds are used to payoff the loan

The existing loan balance on the asset is paid off.   This happens most often when the balance on the loan is very low.  As part of closing, the 1st lien is paid off and that amount is debited from the proceeds of the new loan. 

For Example:  Your business is closing a loan for $50,000 using equipment as collateral.    There is a first lien holder on the equipment and that loan has a payoff balance of $10,000.  At closing, the new lender sends a check for the payoff amount to the first lien holder and takes a 1st position on the collateral.
 

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FAQ on getting a business loan using assets with a lien .

Can I use equipment with a loan on it as collateral?

Lenders may take a 2nd position on the collateral.  In most cases, they will not make a loan if there is a lien on the asset and it is not paid off.

Do I have to payoff the loan first?

You will have to payoff the loan in many cases.   Some real estate and cash flow loans may not require a payoff of the 1st lien holder.   This will vary by lender depending on their guidelines.

Can a lender payoff the loan on my collateral?

Lenders can payoff the loan on your collateral.   The process is faster when the lender pays off the loan because they will verify and also handle the payoff. 

Can I get a loan before I have the title in hand?

Ask the lender if they are willing to close the loan and request payoff and title from the lender holding the title as part of closing.    You will have to have the title in hand if they are not willing to do that.

Conclusion

Getting a business loan using assets with a lien is possible.

Find out the lender’s requirements early in the process.   If allowed, there may be extra steps that can take a few days.   Start right away and you can close a few days sooner.

Between a release of lien, a 2nd position, or payoff, there are several creative ways you may be able to use collateral that has a loan on it right now to get a new loan.

If not, find out if other lenders have different criteria that will allow you to use encumbered collateral.    Checking into these options often lets borrowers get loans they never would have gotten otherwise.