SBA Digest: Best Practices For Ordering Searches

The Small Business Administration ("SBA") requires lenders to use prudent lending practices when financing its government-guaranteed loans. One of the initial due diligence steps for lenders is to run public records searches on the borrowers, sellers, and guarantors to confirm there are no unexpected liens or other issues that could jeopardize the lender's interest in loan collateral. Although searches are important, they are expensive and sometimes difficult to unravel. Lenders can protect themselves and save on costs by understanding what searches are required and how to analyze results depending on the specifics of each transaction. When ordering searches, lenders should consider the following:

Certified Articles of Incorporation/Organization (certified by the state of formation)

  • Articles of incorporation – document legal formation of a corporation;
  • Articles of organization – document legal formation of a limited liability company;
  • Order on borrower entities and guarantor entities.

Certificate of Good Standing from the Secretary of State

  • Certify that a corporation or limited liability company has satisfied statutory requirements and is authorized to do business in a specific state;
  • Order on borrower entities and guarantor entities.

Uniform Commercial Code ("UCC") Search

  • UCC filing – legal form that a creditor files to provide notice that it has or may have an interest in personal property of a debtor;
  • Lender should order UCC search to see if another creditor has an interest in the personal property it is taking as collateral;
  • Order on entities and individuals that are buying, selling, or pledging personal property as collateral in the state where the entity is incorporated/organized or where the individual resides.

Tax lien and Judgment Search

  • Searches for any tax or judgments against entities or individuals that might prime lender’s interest in collateral;
  • Order on borrowers, sellers, and guarantors in the county and state where the business is operating or where the individual resides.

Bankruptcy Search

  • Searches for bankruptcy filings and provides details of open estates or previous discharges;
  • Order on borrowers, sellers, and guarantors.

Litigation Searches

  • Searches for outstanding lawsuits where an entity or individual has been named as a plaintiff or defendant in a legal action.

By running searches early, lenders can analyze the results and make sure that any issues are resolved prior to closing. Because of the unique nature of each transaction, it is important that all aspects of the loan are considered before running searches and analyzing results. Lewis Kappes proudly represents lenders and banks involved in SBA financing, as well as other commercial lending matters. For more information about what searches should be ordered and how to unravel the results, please contact:

Chris Poling: cpoling@lewis-kappes.com

Kevin Morrissey: kmorrissey@lewis-kappes.com

Scott Oliver: soliver@lewis-kappes.com