At Billboard Loans, we get a lot of inquiries for secured loans. Most out of home companies  understand the general concepts of security and collateral but very few understand the details.  Here’s a short lending quiz.

1. Your lender has a security interest in all your assets.True or false.
2. Your lender has a security interest in anything you ever buy.True or false.

Unless you have specifically negotiated otherwise, the correct answer is true to both questions.  I encountered two companies recently who wanted to borrow money from Billboard Loans and didn’t know their lender had tied up all their assets.  In one case, the lender had tied up all the assets of an out of home company to secure a tiny line of credit.

All assets are usually pledged to the lender

Secured Lenders have priority to your assets.  That priority is established based on the collateral, the time of public notice (yes, there will be a public record of the collateral), and possession (yes, some collateral will be held by the Lender.). Every asset you own and that has value is potential collateral including both tangible things such as real estate, billboards, vehicles, and office equipment; and intangible things such as accounts receivable, inventory, contracts, software, and customer data.

Secured Lenders often require a “blanket” pledge, lien, or security interest in all assets including all of the above “whether now owned or hereafter acquired”.  The first Lender that records such a pledge or security interest will have first priority.  Any subsequent secured Lender will have to deal with the secured Lender(s) that came before them. Usually that means subsequent Lenders will not recover any amount until prior secured Lenders have been fully satisfied.

Specific rules for specific types of collateral

The pledge of collateral can take many forms depending on the type of collateral. There are specific rules depending on the collateral.  Most collateral types will require a Security Agreement. Real estate requires a Deed of Trust or a Mortgage, depending on the state. Leases and easements require an Assignment.  Contracts typically require an Assignment.  Cash and securities/stock typically require a Pledge Agreement. All of these documents serve the same general purpose – to describe the collateral and expectations about the collateral such as maintaining it, maintaining records about it, and insuring it.  The taking of collateral will likely also be mentioned in the Promissory Note, Borrowing Agreement, and Borrowing Resolution. As you might have surmised, collateral is a big deal to a secured Lender.

Perfection counts

However, no pledge is complete without “perfection”.  A Lender must follow specific rules to perfect their claim to the collateral in the eyes of the law.  Failing to perfectly perfect their claim could expose the Lender to losing their priority to the collateral or losing their claim to the collateral entirely.  Pledging collateral and perfecting the lien requires a lot of words on a lot of different forms.

Most collateral must be recorded in the state of location and the state of doing business via the Uniform Commercial Code (UCC).  Fortunately, the UCC is the standard across the whole U.S.  The UCC requires the Lender to follow precise rules regarding names and addresses when preparing and filing a UCC statement.

Collateral usually includes anything you ever buy or acquire

The “hereafter acquired” clause mentioned above is especially important when borrowing against current assets like accounts receivable and inventory that are continually being rolled over.  Without such a clause, a Lender relying on those kinds of assets would have to continuously file UCC statements, which is not practical.   Another rule is UCC filings expire after 5 years, so Lenders have to be diligent about “continuing” their filing if the loan is still outstanding.  Lenders are also supposed to be diligent about terminating their filing when a loan is paid in full and satisfied.  However, some Lenders get sloppy about this, so the Borrower should check it is done because it gets harder to resolve as time passes.

Recording matters

For anything regarding real estate, the lien must be recorded in the county where the property is located.  Each property must be described precisely and recorded individually, and rules are not uniform across the entire U.S. For this reason, real estate recordings including leases and easements will typically require the services of a Title Insurance Company.

A few other examples of perfecting a lien are recording the Lender on the title of a vehicle with the state, physically holding a security or stock certificate, or registering a lien with the institution holding the security or stock.

You may be able to limit the collateral pledge.

If your leverage is well below out of home industry standards you may be able to convince your lender to accept a limited pledge of only certain assets.  Another approach is to offer your lender billboards which are worth 125-150% more than the value of your loan.  In that case the security agreement and pledge agreement and UCC-1 will identify only certain assets which are part of the collateral.  A good lawyer will make sure the documents do this.

Ken Altena has 35 years experience lending ot out of home companies. He is a partner in Billboard Loans, LLC. a company which makes loans of up to $1 million to independent out of home companies.  You can reach Ken at kenaltena@billboardloans.com, 206-636-8478

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