Getting A Commercial Loan
Clients frequently meet with an attorney when they are thinking about going into business, buying a business or franchise, expanding their business, or making a large purchase of new business assets (real estate, equipment, etc.). In each of these cases, they usually need to get some sort of financing to achieve their goal. The place that they will normally end up looking to for this financing is a bank.
There are a number of things that commercial borrowers need to do before banks will lend them the money they need. Also, there are several do’s and don’ts that borrowers should keep in mind as they try to keep their costs down in the commercial borrowing process.
As you begin the process of seeking bank financing for your business needs, there are certain things that you can be doing to make the commercial financing process happen. In a recent article in the American Bar Association’s, The Practical Lawyer, Joseph I. McCabe listed 50 tips for getting a commercial loan. Several of the tips that are particularly important include: Research potential lenders to make sure that the one you choose is capable of doing the type of loan you’re seeking; Don’t be involved with numerous loan applications since your credit report will show every lending institution inquiry; Secure a credit report and UCC search on yourself and your business to make sure that any unreleased liens or inaccuracies are dealt with; Make sure your entity annual filings are up to date—if they are not, get them current since you will need to be current in order to get the good standing certificate that your lender will require; Provide a business plan with a business plan summary that is less than 2 pages (the Connecticut Small Business Development Center located at the Greater Danbury Chamber of Commerce is an excellent resource to assist you with this); Be sure your attorney knows that you want the loan and that you are not interested in winning all loan documentation points and battles with bank’s counsel and losing the loan (see discussion below); and, Keep your bank informed—there should be no surprises.
There are several things that you should keep in mind to try to keep your costs down. You need to know that there are certain costs that you will need to incur. Bank fees, attorneys’ fees (yours and the bank’s), filing fees, appraisals, etc. However, you can do several things to keep some of your costs down.
First, don’t try to cut corners. Although it’s tempting to do, and in certain cases advisable, cutting corners frequently can cost you more in the long run. A commercial closing is not like a residential real estate closing. If you approach a commercial closing thinking otherwise you are in for a rude and expensive awakening.
Second, in addition to researching your lender, you should make sure that your attorney has commercial lending experience. Although most attorneys can handle a commercial closing, how your attorney approaches the transaction frequently determines how much you will spend in legal fees for the closing.
As bank’s counsel, I find dealing with borrowers’ attorneys who do extensive commercial work is usually more cost effective for the borrower. If the borrower’s attorney is inexperienced in commercial transactions but willing to follow the bank counsel’s direction, legal fees can also usually be kept in line.
Two types of commercial borrowers’ attorneys usually create higher closing costs for their clients. Commercial attorneys who attempt to make extensive changes to the loan documents in seeking to win every loan term battle in the end may get some changes to the loan documents but will cost their clients significant legal fees (borrower’s and lender’s) since they waste significant time fighting these battles. Also, noncommercial attorneys who seek to do battle on documents that they do not understand frequently waste significant amounts of time and cost their clients significant legal fees in the process.
My favorite experience with the latter type was an attorney in a commercial mortgage transaction who questioned why the bank required title insurance (“I’ve never been required to provide this in a commercial transaction before!”) and then balked at issuing the standard format commercial mortgage loan opinion letter issued by the Connecticut Bar Association Real Property Section (“I’ve never been asked to give such an extensive opinion before!”). The attorney ended up securing title insurance for the borrower and issuing the requested opinion letter. Needless to say, the legal fees paid by the borrower in this transaction were unnecessarily high.
Although the commercial financing process is not simple and rarely cheap, the preparation that borrowers complete and the choices they make during the process frequently determine the extent of the ordeal and the costs they will ultimately incur.