Purchasing used equipment often makes sense for contractors, especially if they know and have confidence in the previous owner. However, whenever purchasing used equipment–even from a known owner, make sure any and all past liens have been accounted for. Experts explain why checking on liens is so important.
Uh-Oh
Supply chain challenges and stretched budgets are keeping the used equipment market strong. Indeed, according to the Pros, most contractors “buy used equipment at one time or another.” Doing so can work out great, whether due to pricing, timing challenges or other considerations. However, there can be bumps that come along with used equipment—and that includes finding out the hard way that a past lien has not been accounted for. For example, Dan Furman of Crest Capital, an equipment financing company, shares this scenario:
You’re a construction company looking to buy a used excavator. You find a great deal on one that another company is selling. You go look at it, and it’s perfect for your needs. Everything looks fine – the selling company has owned it for six years, they paid off the loan, etc. You go ahead and buy it. Six months later, you are contacted by the seller’s bank. It seems the seller has defaulted on another loan they took out two years ago. And written into that unrelated loan was a blanket lien, meaning all of the selling company’s assets at the time were part of it, including the excavator you had since purchased. In short, the bank is claiming ownership, stating it wasn’t allowed to be sold in the first place. You call your lawyer, and they tell you that this is true – the bank legally owns the excavator and can repossess it from you.
Yikes, right? Even if you bump into a less messy, but still frustrating lien situation, it could really wreak havoc on your business and project plans. Curtail the risk of unfortunate surprises by ensuring a diligent Uniform Commercial Code (UCC) search has been completed. Business experts at CSC remind us: “A UCC search reveals any individuals or entities that have filed a claim against business property or other assets pledged on a loan. The search information includes debtor name and address, original date and number, filing state and date files, secured party’s name and address, and document number.”
Although a UCC search should turn up most liens, it does not guarantee a clean title. Actually, nothing guarantees a clean, lien-free title on a piece of equipment, and Furman shares these reasons why:
One is paper trails on used equipment, especially if there were several owners, are hard to follow. Another reason is the high number of variables in a UCC search – the geographic locale searched, company names being similar, a clerk hand-entering a long serial number… there’s plenty of opportunity for misreads and mistakes. But the biggest reason is blanket liens.
A blanket lien is when a lender puts a lien on every asset the borrowing company owns (this clause is very common on all business loans through a bank). For example, if a company borrows money to buy a new vehicle, all its assets, even those they paid off years ago, are now covered by a lien. And this can happen with every loan – it’s not uncommon for assets to have two or three blanket liens on them….Anything with a blanket lien on it technically cannot be sold without the bank’s permission.
Because blanket liens tend to be “in the fine print,” they are very easy to overlook or forget about. In fact, as Furman observes: “If your company has an open bank loan, all of your company’s tangible assets likely have a lien on them. Were you aware of that? Don’t worry if you’re not; most business owners aren’t.” Experts suggest that one way contractors can guard against inadvertently buying used equipment that has a lien on it is to work through an authorized reseller/dealer, and note: “This typically alleviates most lien issues, as most authorized dealers will conduct a UCC search….In addition, most authorized dealers will usually stand behind their claim that the equipment’s title is clean (make sure you ask about this, though).”
Of course there are lots of circumstances under which contractors may decide its preferable to purchase equipment directly from a previous owner. Afterall, there are many trustworthy owners–and there is plenty of equipment with no liens out there. When making a purchase, strive for diligence about the UCC search, following this guidance from experts at Crest Capital:
The first thing is to make sure a UCC search is done, and if need be, conduct it yourself (it’s for your protection, after all).The second is to have all paperwork for the equipment. This includes bills of sale, payoff letters, etc. If possible, make sure the paper trail goes back to the original purchase from the manufacturer or dealer.Buying used equipment from the original owner makes everything easier, as the paper trail gets more challenging to complete with each previous owner….
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