What is a lienholder?
A lienholder is the person or organization that holds a legal claim, also called a lien, to an asset or piece of property until the loan used to buy it is paid off. If you’ve ever taken out a loan to buy a car, you’re likely familiar with the concept — the auto loan lender is your car’s lienholder until the loan is repaid in full.
As a small business owner, you might work with a lienholder when you borrow money to buy a business vehicle, large machinery or equipment, or real estate like an office building.
Liens can also apply in other situations beyond borrowing money. If you hire a contractor to do construction work on your store and you fail to pay them to the terms of your contract, they can put a lien on your property until you pay them for the work, making them a lienholder. Or you, as the business owner, might need to place a lien on someone else’s property because they haven’t paid you. That would make you the lienholder.
Liens describe who gets paid and in what order, so a primary lienholder would have the highest priority in getting paid. A secondary lienholder gets paid once the primary lienholder has received what’s due to them.
Who is a lienholder?
Lienholders can be individuals, institutions or multinational corporations. It depends on the reason for the lien, including what you’ve financed and where the funding comes from.
A lienholder could be:
- A financial institution: This includes banks, credit unions and online lenders.
- An equipment financing company: Many companies specialize in leased business equipment.
- A commercial lender: These offer mortgages for commercial property, like warehouses or storefronts.
- Private investors: These can be individuals or organizations that provide funding to small businesses secured by a lien.
- The Internal Revenue Service: The IRS can place a tax lien on your property until you pay your taxes. Local governments can do this as well.
- A contractor or vendor: A mechanic’s lien is a type of lien a contractor puts in place if a business fails to pay for completed work as outlined in a contract.
- You and your business: You might place a lien on someone else if they haven’t paid you what they owe for completed services. Often, this involves filing a lien with a civil court, which gives you the legal right to be repaid by seizing or selling that business’s assets.
Lienholder vs loss payee
In business insurance, the loss payee mentioned in your policy is the person or organization named on the insurance policy to receive payouts if there’s a business insurance claim for a covered loss.
Naming a loss payee lets the insurance company know where to send reimbursement for the claim. If you used a loan to purchase the property you’re insuring, naming the lender as a loss payee is often required as a condition of the loan. That’s because they still have rights to the property until you’ve paid it off.
Although a loss payee is not the same thing as a lienholder, one entity can be both at the same time. For instance, a lender can be a lienholder, whose primary concern is repayment of the debt. But the lender can also be the loss payee on a business insurance policy, ensuring they receive payment in case of a covered claim. They have an insurable interest in the property until you’ve finished repaying the loan.
Both a lienholder and a loss payee have a financial interest in making sure the property is in good condition, whether it’s a vehicle, a building or a piece of equipment.
If you have a small business loan or a commercial mortgage, make sure your business insurance policy lists the proper loss payee as required by your lender. That also ensures the certificate of insurance (COI) is accurate, which can be important for closing some business deals or leasing property.
Examples of a lienholder in business insurance
Here are a few common examples of lienholders in small business insurance:
- Buying a commercial car, truck, trailer or other business vehicle: Suppose your contracting business needs a new work truck. You buy a heavy duty pickup at a local dealership, financing the purchase with a business loan. The auto loan lender requires to be named as the lienholder on your commercial auto insurance policy.
- Buying a business storefront, shop, office, warehouse or other property: You need space for the new gym you’re opening, so you buy a building with a commercial mortgage. The mortgage lender is the lienholder, and they’re named as such on your commercial property insurance.
- Installing new commercial equipment to grow your business: You lease new kitchen equipment for your catering company. The leasing company that provides the equipment requires that you list them as the lienholder and the loss payee for your new kitchen gear on your Business Owner’s Policy (BOP insurance) to ensure they receive the payout if you file a claim after a fire or other covered event.
Naming a lender as a lienholder in your business insurance is often a condition for a business loan to help you get what you need to encourage business growth. It helps to assure lenders that they’ll be reimbursed if things go wrong.
