SBA loans are often used to finance restaurants, liquor stores or other retail establishments that sell, and in some cases, serve, alcoholic beverages to their customers. As SBA lenders structure their loans for these businesses and determine what collateral is required for their loans, questions may arise regarding whether a lien can be placed on the business’ liquor license. In order to comply with SBA’s requirement to take a lien on all business assets until the loan is fully secured, it is important for SBA lenders to have a basic understanding of how liquor license laws vary from state to state, and when licenses can, and cannot, serve as collateral for an SBA loan.
In general, there are three considerations for the lender to weigh when deciding if it should lien a liquor license:
- Is the liquor license lienable?
- Does the liquor license have collateral value?
- What is the correct process to place a lien on the liquor license?
A liquor license may be lienable if a state regards the license as personal property, and not merely as a “privilege” to do business. Accordingly, because states could view liquor licenses as either property or a privilege, the laws regarding liquor licenses vary greatly from state to state. Generally, however, states typically divide into one of two categories: “quota” and “non-quota” states. A “quota” state places population-based caps on the number of liquor licenses available, which effectively forces a business to look for a license on the secondary market and drives up the value. These states tend to view licenses as personal property. Historically, there have been 17 “quota” states:
|New Jersey||New Mexico||Ohio||Pennsylvania||South Dakota|
Many quota states permit a lien to be placed on the liquor license, including Florida, Massachusetts, Michigan, Minnesota, Montana, New Mexico, Pennsylvania, South Dakota, and Washington. Notable exceptions that do not permit a lien include California, New Jersey and Ohio.
In a non-quota states, liquor licenses typically hold almost no value as they are plentiful (no caps) and tend to expire unless renewed frequently; there is no value because there would likely be nothing gained by the lender in placing the lien even if it is permissible to do so. In certain non-quota states, it is actually prohibited by law to place a lien on a liquor license, because the liquor license is not considered tangible nor intangible property but rather a privilege, and the state wants to protect the license from any device which would subject it to the control of persons other than the licensee.
Due to great variations in the liquor license lien process, it is extremely important that the lender confirms with local counsel that the correct lien process is followed in order to protect the collateral and the SBA guarantee in the event of a borrower default and liquidation of the SBA loan. In the event a lien in a liquor license is not pursued, either because it is prohibited orbecause it has no real collateral value, the reasons for not taking the license should be clearly discussed in the lender’s credit approval.
For more information regarding liquor license liens, please contact Ethan at 267-470-1186 or firstname.lastname@example.org.