Future liens: Overview, definition, and example
What are future liens?
Future liens are legal claims or rights that a lender or creditor can place on a borrower’s property or assets in the future, even though the lien is not in place yet. These liens are typically created through a contract or agreement, allowing a creditor to secure a claim on specific property or assets once they are acquired or once certain conditions are met. Essentially, a future lien acts as a “promise” that the creditor will have a legal claim on property at a later date.
In simpler terms, a future lien is a way for a lender to have a potential claim on property that hasn't yet been bought or acquired but will be in the future.
Why are future liens important?
Future liens are important because they provide security to creditors, ensuring they have a legal right to a borrower’s property or assets once they are obtained, even if they don't yet exist. For businesses, these liens can help secure future financing or credit by offering lenders a form of collateral.
For SMB owners, understanding future liens is essential when securing loans or credit that will be paid off over time. Future liens help both parties (lender and borrower) agree on terms for securing future assets, reducing risk and ensuring the loan is backed by real, tangible property when the time comes.
Understanding future liens through an example
Imagine your company takes out a loan to buy new equipment, but the equipment hasn’t been purchased yet. As part of the loan agreement, the lender requests a future lien on the equipment once it is acquired. This means that if your business is unable to repay the loan, the lender has the legal right to seize the equipment once it’s purchased, even though the lien doesn’t apply until the equipment is in your possession.
Example of a future liens clause
Here’s an example of what a future liens clause might look like in a contract:
“The Borrower agrees that any property or assets acquired after the execution of this Agreement, including but not limited to equipment, inventory, or real estate, shall be subject to a future lien in favor of the Lender. The Lender shall have the right to file a lien on such property as collateral for the loan, upon acquisition by the Borrower.”
Conclusion
Future liens are a useful tool for both businesses and creditors to secure property or assets that may be acquired in the future. For SMB owners, understanding future liens can help you structure loans and financing arrangements that protect your business while ensuring lenders have a way to secure their investment. By agreeing to future liens, you can ensure the business has the necessary collateral to back up future assets and obligations.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.