PROBLEM

Lenders must be aware of the various risks associated with different types of collateral used to secure a loan.

STRATEGIC SOLUTION

To minimize risk, savvy lenders will assess various types of collateral, as illustrated in the following case.

CASE SUMMARY

Erin O'Connor is a senior loan officer at First Arizona Bank & Trust. Erin was recently approached by the chief financial officer (CFO) at Kitchella large, privately held Arizona real estate development and construction companyto discuss a loan made to the company in the amount of $1,000,000. Erin has asked Kitchell's CFO to provide a list of assets that can secure the loan, and the CFO replies that the company can offer as security "all of our information technology equipment."

TASK

"Visit the Arizona Secretary of State website(Links to an external site.) and conduct a Uniform Commercial Code (UCC) lien search of the state's publicly accessible database. Search for UCC-1 filings under the organization name "Kitchell."

QUESTIONS

Should Erin approve the loan based on this collateral? Why or why not?

Before offering the loan, what should Erin do to ensure that First Arizona Bank & Trust will have priority with respect to this collateral?

Visit the Arizona Secretary of State website and conduct a UCC lien search of the state's publicly accessible database. Search for UCC-1 filings under the organization name "Kitchell."

What did you find?

How will this impact whether First Arizona Bank & Trust will offer the secured loan?

What should Erin do now?

Erin contacts the Kitchell CFO and mentions that her bank will require another type of collateral. The CFO mentions that Kitchell has "valuable artwork in the office and $750,000 sitting in a low interest bearing money market account at Sun Valley National Bank." How can First Arizona Bank & Trust perfect these assets if they are used as collateral to obtain priority over any other creditors?