You know the drill. The secured lender is looking to finance a borrower and it runs a UCC search with the central level filing system of the state of organization to see if there are any prior UCC-1 financing statements filed against the borrower and the search comes up clear. We’re done, right? Sign the loan documents and fund? Not so quickly.

Although the central level UCC search can give you an accurate list of secured creditors that have filed UCC-1 financing statements naming the borrower as a debtor, there are could be other third parties with a claim against your borrower that you may want to know about before you fund.

The first example of this is a Federal Tax lien. According to the tax code, the Federal Government can file a Notice of Federal Tax Lien in the state where the principal executive office of the business is located. As we all know, the principal executive office of a business may not be the same as the state of formation or incorporation. Also, the tax code does not specify that the filing has to be at the central level filing system within the state. Therefore, the Notice of Federal Tax Lien may be filed at the county level. So now you may have at least two other searches to run. It is important to note that a Federal Tax Lien existing at the initial funding of your loan primes your lien and a Federal Tax Lien filed after you fund will prime your lien with respect to after-acquired assets of the borrower after some timing requirements. So it is important to stay on top of the borrower after funding to make sure it is paying its taxes and run updated searches periodically to make sure no new Notices of Federal Tax Lien have been filed. Lenders that run such searches generally run them on an annual basis.

You also want to be aware of your borrower’s litigation and bankruptcy history. Lawsuits can be filed by customers in any jurisdiction. For example, I had a borrower recently that was incorporated in Delaware with its headquarters in Arkansas and business locations in many southern states. A customer filed a material lawsuit in Tennessee where one of the company’s stores was located. Now, depending on the size of your customer and how many counties and states it operates in, the cost of running this search can be very expensive. However, you may not need to go to every county and run a local level search as there are databases that are available that can provide this information to you. These results from these databases may not be as accurate as obtaining a local level search, but can give you a fairly accurate picture of the litigation history of the borrower and help you narrow down your local level searches.

Also, don’t forget to run a Bankruptcy filing search. Bankruptcy filing could be in the state of organization of the company or where the company has its main place of business. This is a simple and fairly inexpensive search that can give you a great deal of insight into the company’s past.

Finally, keep in mind that depending upon the borrower’s line of business there may be other interested third parties out there that a lender would want to know about and properly analyze. Prospective lenders should run the analysis with their counsel handling the transaction to make sure all bases are covered.