March 9, 2011

Firm News for March: Best Practices: Fictitious Names

By: Janet M. Dery, Esq.

In U.S. Small Business Administration (“SBA”) guaranteed lending there seems to be some confusion over the importance of a business entity’s fictitious name, also known as a trade name or doing business as (“dba”) name. Many lenders are unclear as to whether it is just a “naming convention” used by the SBA to identify its loans, or if it has greater significance.

Generally, a fictitious name is a name that a business operates under but which is different than the “legal name” of the business entity. Legal name includes the name of a sole proprietor or the name stated on an entity’s Articles of Incorporation/Organization/Formation that is filed in its home state. Because fictitious names are often registered with company designators such as “Inc.” or “LLC” lenders should take care to confirm the correct legal name of its borrower before ordering searches or drafting loan documents.

SBA requires lenders to confirm with the appropriate governmental office that the business entity has properly registered its fictitious name filing (state law generally controls whether the filing of a fictitious name can be done and where it should be filed). Most states that do require filing of a fictitious name do so for notice purposes. The registration allows a party that has a claim against the business entity, but only knows the fictitious name, to discover the correct business entity to pursue.

For a business entity, the benefit of doing business under a fictitious name may arise from the good will associated with the business name, whether through a franchise name that is widely known or as a long-standing and respected business in a local community. Please note that many franchise agreements provide that a franchisee may only file a fictitious name filing if expressly permitted by the franchisor. Accordingly, the franchise agreement entered into by the business should be reviewed to see if registration of the trade name is permitted.

For a lender, the fictitious name provides guidance on what type of business the borrower will be engaged in. If the name is a franchise name and that franchise is listed on the SBA Franchise Registry, then the lender can obtain the payment and default history of SBA guaranteed loans to other franchisees. The fictitious name also acts as the loan name when the SBA agrees to guaranty a loan to the business entity.

Most lenders believe that the fictitious name is important and should be included in the loan documents. However, lenders disagree about how it should be included and in what capacity. The best practice for including the fictitious name in the loan documents is to minimize its inclusion in the loan documents. Fictitious names should never be used on UCC-1 financing statements as Article 9 of the Uniform Commercial Code requires the use of the borrower’s correct legal name to properly perfect the lender’s lien. Additionally, use of a fictitious name in security documents could be read to limit a lender’s blanket lien to those assets used in the business that operates under that trade name. Although the risk is small, employing these best practices may help avoid repairs to your SBA guaranty.

For more information on fictitious names or other business entity documentation, contact Janet at 215-542-7070, or