statutory lien

What is a Statutory Lien?

A statutory lien is a legal claim or hold on property that is established by law. This type of lien arises out of statutes that grant the right to hold another's property as collateral until a debt or duty is satisfied. Statutory liens are automatically attached to the property that is related to the law creating the lien. Common examples are tax liens or contractor's liens, which provide security to ensure payment of obligations.

The Role of Statutory Liens in Financial Factoring

In financial factoring, a business sells its accounts receivable to a third party, called a factor, at a discount to obtain immediate cash. Factors are particularly interested in the presence of any statutory liens because these may take precedence over the factor's claim to the receivables. A statutory lien can affect the factor’s ability to collect payments, as the law may allow the holder of a statutory lien to be paid first.

Understanding the Impact

When a company engages in factoring, it is essential to disclose if a statutory lien exists. Doing so enables the factor to make an informed decision and assess the risk accurately. A statutory lien may reduce the value of the receivables or could complicate the factoring agreement. Companies with statutory liens on their assets might face higher costs or difficulty in securing factoring services.

Examples of Statutory Liens

Examples of statutory liens include liens for unpaid property taxes, which attach to real estate, and mechanic's liens, which contractors can place on a property they have improved but not been paid for. Understanding which statutory liens might apply is vital for both the company seeking factoring and the factor itself.

Managing Risks

To manage the risks associated with statutory liens, factors will typically perform detailed due diligence. They often require a written warranty that no statutory liens exist, or if they do, that the factor will have priority over those liens. Proper due diligence ensures that the factor can proceed securely with the transaction.

Conclusion

A statutory lien can significantly influence the agreement between a company and a factor. By understanding and appropriately managing statutory liens, companies can leverage the benefits of financial factoring without facing unexpected hurdles. It's another reason why attention to detail is critical in financial transactions.