As we have written in the past, sometimes making risky credit decisions can be beneficial to your business. In certain situations, especially when a physical product is involved, these riskier credit decisions can use an added bit of certainty. While a lien can take many forms, the idea is that it gives your business a right to the property belonging to another company until a debt owed by that company is discharged. Meaning, if the company fails to pay you for the product, you can reclaim it or other assets used as collateral to recover your loss. While this can be a useful strategy for hedging your risk, it does come with its own problems.

What Types of Business Does This Make Sense For?

In its most basic form, a lien means that you have a security interest to the product that you are selling to that company on credit until they have paid you in full for the product. This is the simplest form of a lien, and basically just guarantees your right to your product should your customer go bankrupt or fail to pay. For these cases, it really only makes sense to use this if you sell a physical product that can be recovered in this circumstance.

There are other types of liens that involve your customer offering other types of assets as collateral, instead of the product you are selling itself. While this accomplishes the same thing, it is typically harder to arrange and get a customer to agree to. It also can create more headaches for you in the event you then have to figure out how to deal with that asset.

When Should You request the use of lien?

This can be tricky as not all customers will want to give up that type of power. In an ideal world, you would have this agreement with all of your customers. Realistically, this is something that you should request in two cases. You should request this when an existing customer begins to fall behind on their payments and pay slower but is still making consistent payments. In this case, they are clearly having cash flow problems but can still afford their payments in time. A lien on the product you sell them would give you the extra piece of mind knowing you can recover most of your assets should things get worse.

The second case where a lien makes sense if a new customer requests a large amount of upfront inventory. Obviously, the customer’s other financials should also add up and make sense, but having a lien on the product can help make up for the lack of trust and history between you and this company.

Liens are complicated and come in all different forms. If you are considering using a lien we recommend you contact a lawyer in your state to make sure you do it correctly. Used correctly though, a simple lien on assets sold on credit can add another safeguard to your credit process and can be used as another tool in your credit tool belt.