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Lien position
Also called priority, first position, second position, lien priority.
The order in which secured creditors are paid out of the same collateral — decided almost always by who filed first, and the single provision that determines who recovers anything in a default.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
What it means
When a business fails, the collateral is sold once and the proceeds are distributed in order. First position is paid in full — principal, accrued interest, costs, enforcement expenses — before second position receives a dollar. In most small-business liquidations the queue does not reach second position at all.
How priority is actually determined
Under UCC Article 9 the general rule is first to file or perfect. Not first to lend, not first to negotiate, not whoever the borrower promised. If Funder B files a financing statement on Tuesday and Funder A, who advanced money three weeks earlier, files on Thursday, B is senior as to the shared collateral.
The main departures:
- Purchase-money security interests in equipment and inventory can prime an earlier blanket lien on that specific collateral if perfected within the statutory window and, for inventory, with advance written notice to the existing secured party
- Control beats filing for deposit accounts, so a bank with a deposit account control agreement outranks a blanket filer on the cash in that account
- Contract overrides everything: a subordination or intercreditor agreement can reorder positions regardless of filing date
Why a second UCC filing is not harmless
This is the part owners get wrong, and it has almost nothing to do with the collateral.
- The negative pledge. Bank loan agreements, ABL facilities and most SBA-backed loans prohibit granting further liens on the collateral. A second filing is therefore an event of default under the senior loan, on the day it appears, even though the senior loan is completely current. The senior may accelerate, freeze the line, sweep the account, or demand repayment
- The bank finds out. Lenders run periodic UCC searches on their borrowers. This is routine and automated. Nobody has to tell them
- It blocks everything afterwards. Refinancing, an SBA closing, an equipment lease, a business sale — all require clear title or subordination, and the junior lienholder has no obligation to subordinate. It can refuse, or charge for it. Its leverage at that moment is total
- In stress, the junior moves first. A subordinate funder cannot recover from the collateral, so its rational strategy is to grab cash before the senior reacts: accelerate the daily debit, notify account debtors, levy the operating account. That destroys the working capital the senior was relying on, which is exactly why senior lenders write the negative pledge
The industry's use of the word
In merchant cash advance, "first position" and "second position" describe the order in which advances were taken, not UCC priority. A funder that calls itself a second-position funder may well have filed first and be legally senior. And where several funders file within days of each other, the recorded order can bear no relation to which deal anyone thinks came first.
Where this one catches people
"It's only a second position, my bank won't care." The bank will care, and not because of the collateral — because of the negative-pledge covenant in the loan agreement, which makes the second filing itself a default. Owners who take a small advance while carrying a bank line frequently trigger acceleration on a facility ten times the size and cannot understand why, since every payment was made on time. The related error is assuming position follows the order deals were signed. It follows the filing record, and that record is public, timestamped, and not what the sales conversation described.
Worked through
Illustrative. Collateral realises $300,000. First position is owed $240,000 plus $28,000 of interest, costs and enforcement expenses. Second position is owed $120,000. Third position is owed $60,000.
First position takes $268,000. Second position receives the remaining $32,000 against a $120,000 claim. Third position receives nothing.
Both junior creditors then pursue the guarantor personally for their shortfalls — $88,000 and $60,000 — which is where the real recovery in junior positions usually comes from.
Figures in the example are illustrative. They show the arithmetic, not a quote — what any one lender would charge is on that lender's page, where it is published at all.
Where you will meet this term
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Lien position — common questions
What does lien position mean?
The order in which secured creditors are paid out of the same collateral — decided almost always by who filed first, and the single provision that determines who recovers anything in a default.
Where does lien position catch people out?
"It's only a second position, my bank won't care." The bank will care, and not because of the collateral — because of the negative-pledge covenant in the loan agreement, which makes the second filing itself a default. Owners who take a small advance while carrying a bank line frequently trigger acceleration on a facility ten times the size and cannot understand why, since every payment was made on time. The related error is assuming position follows the order deals were signed. It follows the filing record, and that record is public, timestamped, and not what the sales conversation described.
Is lien position the same as an interest rate?
Lien position is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does lien position apply to?
Merchant Cash Advance, Working Capital, Term Loan, Business Line of Credit, Equipment Financing, Asset-Based Lending.
Is there a worked example of lien position?
Yes, on this page, and it is labelled illustrative. It shows the arithmetic, not a quote from any lender.
What else should I read alongside lien position?
Blanket lien, Covenant, Intercreditor agreement, Junior lien, Lien.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.