Factor’s lien is a type of security interest in property that allows agents and sometimes other parties to have their rights secured in property of a principal. This allows factors to recover owed fees and expenses from the secured property should the principal fail to pay.
Traditional factor’s liens are covered under common law and sometimes statutory law depending on the state. Under both, the lien over the products from the principal can arise automatically if the relationship between the parties is one of a factor and principal. For example, a boat store allows companies, for a fee, to have their boats displayed in their store for sale; the boat store may have an automatic lien over the boats from a company should they not pay the store owner their share from the prior boats sold. Many factor relationships, however, come about through contracts which may alter some but not all of the rights of the factor.
In the early-mid 20th century, factor’s liens began to be used as a method for creditors to have security interests in merchandise, goods, and equipment they funded for businesses. Creditors previously had limited ways of recovering from a judgment against a debtor related to funded goods that either did not cover the rotating nature of merchandise or required the creditors to have possession of the property. Factor’s liens, however, allowed creditors to have a general right to the goods which they funded even though the specific items may change. Statutes for factor’s liens began formalizing this use of factor’s liens as a method of securing credit for goods and equipment.
Today, most of the securities used for goods and equipment are covered under the UCC and other laws regarding securitization instead of the law of factors. Factor’s liens as a matter of common law and statutes in limited circumstances still exist to protect factors where their interest in property of a principal was not sufficiently documented in contract.
[Last updated in March of 2023 by the Wex Definitions Team]