Michigan Business Lawyer Blog

Although the average Michigan business participates in a number of "secured transactions" during its life cycle, most Michigan entrepreneurs and business people would be hard pressed to explain just what a secured transaction is or the Michigan legal rules that govern these sorts of transactions.

In simple terms, a secured transaction occurs when someone borrows money in order to acquire some type of property. The property may be real estate, business equipment or even vehicles. Typically, to make the loan, the lender will require a "security interest" in collateral that the borrower owns. The security interest allows the secured party (i.e., the lender) to take the property that the borrower pledged as collateral if the borrower does not repay the loan. In Michigan, the terms "security interest" and "lien" are often used interchangeably.

The law governing the creation and perfection of security interests is known as the Uniform Commercial Code. The Uniform Commercial Code (UCC) is one of a number of uniform acts that have been introduced in an attempt to harmonize commercial law throughout the various legal jurisdictions in the United States. The UCC has been adopted in one form or another by all fifty states. The Michigan Uniform Commercial Code was first adopted in 1962, and has been amended at various times throughout the years since.

Michigan's UCC is divided into nine separate Articles. Article 9 of Michigan's UCC deals with lenders taking security interests in borrowers' collateral to secure loans. Under Article 9, a lender’s security interest attaches when:

(a) the collateral is in the possession of the secured party pursuant to agreement, or the borrower has signed a security agreement which contains a description of the collateral;

(b) value has been given; and

(c) the borrower has rights in the collateral.

A security interest becomes protected against the claims of others when it is “perfected”. With certain exceptions, under Michigan law a lender must file a Michigan UCC financing statement with the Michigan Secretary of State in order to give public notice of its security interest and “perfect” that interest as against other members of the public who may have some type of interest in the collateral. Under Michigan law, if there is more than one perfected security interest in one piece of collateral, the interest that was perfected first will generally be given priority.

The law governing security interests is very technical and can be quite complex. Any Michigan business or entrepreneur who is asked to give a security interest to secure a loan or is loaning money and wants to secure repayment should consult with an experienced Michigan business lawyer for assistance with protecting their interests.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Business Financing

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At some point, virtually every business will need to borrow money to finance its operations or expansions. Financing can be used to fund working capital or other financial needs such as funding inventory, equipment, buildings, plants, and general business growth. Businesses obtain loans from a number of different sources that range from the traditional (banks) to the more exotic (finance and factoring companies).

There are many different kinds of loans; one size definitely does not fit all. Therefore, it is imperative that a business seeking a commercial loan gets the kind of loan that it needs, and that works well for that particular business. Loan options include lines of credit, term loans, real estate loans, equipment leasing, factoring, and industrial revenue bond financing.

Any Michigan business that is getting a commercial loan should seek the advice of a competent Michigan business lawyer (with real estate financing experience) to help them in the process. A commercial borrower's lawyer has four main responsibilities to his or her client. First, a borrower's lawyer will help ensure the borrower understands the loan itself and is actually getting the loan the borrower thought it was getting. Second, the borrower's lawyer will review the loan documentation and try to get the appropriate changes made to protect the borrower in the areas that are important to the borrower. Third, the borrower's lawyer will review the loan's terms and conditions so the borrower fully understands its rights and responsibilities under the loan. Fourth, the borrower's lawyer will attend the loan closing and help facilitate a smooth cap to the loan transaction.

It is best for a business to involve its attorney as early in the loan process as possible. Ideally, a business will be in communication with its lawyer before the loan commitment letter is signed. This will help make it possible for its lawyer to fully assist and protect the borrower in the loan negotiation process.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Business Financing , Financing , General Topics

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The U.S. Department of Labor has posted a very useful tool for businesses to research minimum wage laws that may apply to them. This tool is an easy to use minimum wage law map on the Department of Labor's website. To find the information, simply click on the desired state and the basic minimum wage rate appears, along with any applicable laws. Of course, businesses should consult with their legal adviser if they have any questions regarding these laws.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Business Financing , Employment Law , General Topics

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What in the world is Michigan usury law? Basically, it's the law that prevents lenders from charging unfair interest rates to borrowers. This law is a very important regulation on loan agreements entered into in the State of Michigan. However, Michigan's usury law is not always easy to locate or understand. Actually, to be more accurate, it's a crazy patchwork of statutes that are not always easy to understand.

The general interest-rate statute in Michigan is MCL 438.31, which states that "the interest on money shall be at the rate of $5.00 upon $100 for a year". However, the statute goes on to state that parties can lawfully stipulate in writing for an interest rate not to exceed 7% per annum. But, the statute further states that it shall not apply to interest rates "regulated by any other law of this state," or render illegal an interest rate contained in a promissory note or other debt instrument issued by any borrower who is not domiciled in Michigan which is legal under the law of the borrower's domicile.

Under MCL 438.32, any seller or lender who enters into any loan agreement or contract that does not comply with the requirements of MCL 438.31 or charges interest greater than that allowed under that statute "is barred from the recovery of any interest, any official fees, delinquency or collection charge, attorney fees or court costs and the borrower shall be entitled to recover his attorney fees and court costs from the seller, lender or assigns."

MCL 438.41 is Michigan's "criminal usury" statute, and provides that "a person is guilty of criminal usury when, not being authorized or permitted by law to do so, he knowingly charges, takes or receives any money or other property as interest on the loan or forbearance of any money or other property, at a rate exceeding 25% at simple interest per annum or the equivalent rate for a longer or shorter period."

While these statutes may seem straightforward, there are many different exceptions that allow for certain debts to be charged interest greater than 7% per year. These exceptions include loans that are secured by a first lien on real estate, business purpose loans, credit card debts, among others. Under the statutory language, it even appears that some loans may even be exempt from the criminal usury statute.

It is important to consult with a knowledgeable Michigan lawyer when faced with issues relating to loans and the legal interest rates that can be charged for those loans. The stakes are high and those who ignore these laws do so at their own peril.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Business Financing , Financing , Usury Issues

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One of the most important practical issues that a new company must deal with is financing. Although there are many different financing options, they basically boil down to two types of capital infusions: equity capital or debt capital. Equity capital consists of the owners' investment in the company. Debt capital comes from a loan. Most new businesses are financed by a combination of debt and equity capital.

Equity Financing
There are a number of advantages to funding a start-up company with equity capital. First, since it is a permanent investment, it does not have to be paid back. This relieves a new business of the (sometimes substantial) burden to its cash flow that comes with the responsibility of repaying a loan. A second advantage is that the more company owners invest in the business by way of equity capital, the greater the new company's creditworthiness will be. That in turn will enable the business to get more favorable payment terms from vendors and will also lay a sold foundation for leasing and bank financing on favorable terms. Similarly, a significant equity investment by the owners of a new company also promotes the new business's creditability with financial institutions, its suppliers, and its customers.

Debt Capital
Many businesses obtain start-up funds by getting loans from relatives, friends, business associates, private investors, and banks. These loans can be in the form of traditional loans or by way of an exchange of ownership stock. However, as much as possible, it is best that debt capital come through a traditional loan and not an exchange of ownership stock so that the new company's owners can maintain the largest ownership percentage possible. Loans may come in the form of a direct loan or they can be in the form of a personal guarantee of a bank loan to the business. Although many banks will not normally make loans to new or risky businesses, the federal Small Business Association has a number of loan guaranty programs that can make it possible for new businesses to obtain debt capital financing that would otherwise be unavailable.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Business Financing

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