Legal Definitions - factor's lien

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 means that if the principal fails to pay the owed fees and expenses, the factor can recover them from the secured property.

For example, let's say a boat store allows companies to display their boats 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. This means that if the company fails to pay the store owner, the store owner can recover the owed fees from the boats.

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. 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. 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.