Collateral is a principle concept in many loans. The idea is that the lender can seek compensation for their investment if the borrower doesn’t deliver on their promise to repay the debt. It legally connects a loan to a piece of property. For example, a prospective business owner might use a car or home as collateral on startup loan. If they don’t pay their loan back, their car or home is them sold to pay off the debt.
A construction lien, also called a mechanics lien, follows the same idea. It’s a legal document that says if a project isn’t paid for, then your business can recoup its investment by taking possession of the property. It’s used in many construction cases from replacing windows in a home to the construction of an entirely new building.
Construction liens have two primary goals:
To get the attention of the property owner
A key part of any business is to protect your investments. If not for a lien, a business you’ve worked with could skip payment and still reap the benefits of your labor. By connecting the fruit of your labor to their business, the property owners are more invested in the project.
To secure your investment in a project
There’s pride in a job well done, but businesses are about more than shiny new things. Your time is worth money and a lien guarantees that you’ll receive something for your time, even if your business partners run into hard times or prove untrustworthy.
Getting full protection
Liens are truly to secure your business against fraud and dishonest business partners. While a construction lien is common legal paperwork, that does not mean that every lien is the same and that a cookie cutter form will meet your needs. After all, the point of a lien is to protect you, so it’s important to work with seasoned legal professionals who understand the many nuances and regulations of different state laws as they apply to your own business.