Business Glossary

lender's claim to assets pledged by a borrower securing payment of an obligation. A lender's interest, also known as a lien, is said to attach to the borrower's property, and consists of two limited rights: foreclosure and priority. A lender who files a financing statement, which is often the same document as the security agreement, with the appropriate state or county official gives legal notice to other creditors that a lien has been filed. This process, known as perfecting a lien, commonly is done in commercial lending of a lien that is valid against claims of other creditors and most third parties.

legal code that standardizes business law in the United States. The Code was formulated in 1952 by the National Conference of Commissioners on United States Laws. The Code was offered to the state legislatures, and all states except Louisiana adopted it. For example, the Code covers regulations on commercial paper, warranties, uncertified checks, written agency agreements, security agreements, and bankruptcy. The Uniform Commercial Code is followed by practicing lawyers.

lien securing a note payable that has as collateral real assets and that requires periodic payments. For personal property, such as machines or equipment, the lien is called a chattel mortgage. Mortgages can be issued to finance the acquisition of assets, construction of plants, and modernization of facilities. The bank will require that the value of the property exceed the mortgage on that property. Mortgages have a number of advantages over other debt instruments, including favorable interest rates, fewer financing restrictions, and extended maturity date for loan repayment.

document giving a lender a security interest in assets or property pledged as collateral. This agreement, signed by the borrower, describes the collateral and its location in sufficient detail so the lender can identify it, and assigns to the lender the right to sell or dispose of the assigned collateral if the borrower is unable to pay the obligation. The security agreement may contain loan covenants governing the advancement of funds, and a schedule for repayment of principal and interest, or require the borrower to obtain insurance coverage for the assets pledged.

The security agreement may cover nonpossessory liens in intangible property such as accounts receivable, or a possessory lien, in which the lender holds the collateral, for example, stock certificates, until the loan is fully paid. In some loans, the security agreement is also the financing statement filed with a public records office, if it has the signatures of both borrower and lender.

financing secured by a firm's balance sheet assets, such as inventory, receivables, or collateral other than real estate. The most common forms are accounts receivable financing, in which the lender advances funds against trade receivables, inventory lending, and equipment leasing. Asset-based lending covers a broad range of secured lending activities, and is used to support the credit needs of firms that cannot obtain bank financing on a fully unsecured basis. Also called "asset financing" or "asset-based financing".

security interest in collateral securing a debt protected from claims by third parties. To properly file a lien and take a security interest in property owned by the borrower, a lender must file the lien with the appropriate legal authority. Perfection of a lien on real estate is accomplished by recording the mortgage deed of trust in public land records of a municipality, such as a town clerk's office.

Perfecting a lien on stocks, bonds, or other assets owned by the borrower (known as personal property, as opposed to real property, or real estate) occurs when the lender files a financing statement listing the type of collateral securing the loan, and its location, in a designated filing place, generally the office of the Secretary of the State or a county recorder's office.

The lender's financing statement gives the lender priority status ahead of creditors filing subsequent liens, and is valid for a five-year period. The filing date is recorded, and the lender's documents are assigned a file number. These documents contain a detailed record of the collateral pledged or taken by the lender, establishing the lender's claim against assets by the borrower in event that the borrower defaults or goes bankrupt.

short-term loan that normally is unsecured by pledge of assets or collateral, and is repayable from cash generated by sale of assets. In a cash flow loan, the ultimate source of repayment may be the income generated from nonrecurring gainssuch as a sale of assets through divestiture or sale of common stock.