Booking: The final stage in the commercial loan processing is booking. You have made it. This happens when you return the signed documentation to the lender. The lender will review and image the documents. They will typically fund your loan the same day they get the signed or executed documents back. It is best to turn in your documents in the morning to ensure timely funding. Wire cut off times, holidays, or other circumstances may delay your booking and funding a day or two.

Due diligence reports like appraisals and feasibility studies will be ordered and reviewed during this stage. You will be expected to pay for these reports. Sometimes lenders will issue a conditional commitment letter before you order these reports.

Underwriting is when the final decision to approve or deny your request will be made. A commitment letter is issued during underwriting if the lender approves your request. In some cases multiple approvals may be needed for a final commitment. This is normal when the SBA or other participating lenders are involved.

Gathering: This entails putting together your complete loan package. This stage can take as long as needed for the borrower, you, to gather all the needed info for your banker.

Prescreening: Your banker will review your loan package for accuracy and completeness. He/she will look for red flags or deal killers. They may even conduct some preliminary underwriting. In some cases, your banker will prepare the full underwriting and be your first approval. This stage can take a couple days to a week. A letter of intent is customary to request at this time. Although it isn’t an approval, it will outline fees, rates and terms if your loan were approved.

• Is this a turn around business acquisition? Lenders do not like to lend money to failing businesses. If there is a declining sales trend you will have an extremely difficult time finding a lender.
• How long has the business being acquired been in operation?
• What tangible assets does the business have? How much of the purchase price is intangible assets like goodwill/brand equity?
• Strategic Experience: Does the borrower have strategic management experience?
• Technical Experience: Does the borrower know how to run the basic business functions?
• What is the length of time the borrower has in the industry? Lenders look for 3-5 years of direct industry experience.
• How much skin in the game will be present by the new owners? There is no such thing as 100% financing in the loan world.

If you take the time to consider these questions/rules above concerning business acquisitions loans, you will be much better prepared to visit with your banker about your loan needs. You will also be better prepared to take over the business.

A closer analysis showed the business had lost money each year it was in business. Even when sales were high, money was still lost at the bottom line. The management of the P&L operating expenses were never such that it became profitable. The doctors scaled back the practice in hopes that by spending less advertising dollars and other marketing campaigns they could keep more revenue at the bottom line.

In desperation these doctors wanted out. My family friend believed in the business and it’s concept; however, she did not know how to build a plan to make the business thrive. There were not strategic management skills from the executive level. Although she is a fantastic technician and customer service oriented individual, the vision to run a business was not present. The decision to buy was an emotion decision at best.

What can you learn from this experience as you approach your business acquisition loan request?

Over the next couple of days we will explore business acquisition loans and what lenders will be looking for. The more you know about the lenders expectations, the greater chance you will have of getting your loan request funded. Take some time to really “know” the business you are looking to buy. It will go miles with the lender and ensure you don’t make a big mistake.

• Bait and switch. This is when a lender will give you one set of terms in a letter or verbal quote in an effort to get you to exclusively work with them. This takes other bankers out of the running. Because of the time you will spend with a lender, you are unlikely to switch to another lender once you have submitted all your paper work. You are even more unlikely to switch if you have to start the process over which could be 30-60 days of work. Some lenders will do this by accident; other lenders use this as a tactic.
• No communication via email or phone calls is typically a bad sign. You don’t want to badger the lender each day, but you should expect regular updates as to the status of your loan.
• Overly confident bankers. If your banker is painting a bed of roses for you, be careful.
• If the rates and terms are unbelievable, they probably are. Make sure what you are offered is competitive within the market place. If it seems too aggressive, this should be a red flag.
• Large deposits up front. Some brokers/lenders will take a large packaging fee or deposit when you submit your loan package. Tread carefully here. If this fee is not refundable, be even more careful no matter how convincing the contact/person may be.
• Quick turn around time. Commercial loans take time. If you submit a loan file and have an approval the next day, you might be dealing with a bad lender. There are “fee shops” in the commercial lending environment. These shops produce letters, take a fee and then never fund your loan.

Hiring an expert to help you navigate this environment will help tremendously in avoiding pitfalls and setting correct expectations. This list is not exclusive to all the red flags in the industry, but they are the major ones.

• Does this lender have the ability to lend? Some brokers will issue a letter of intent to a borrower to outline the terms; however, without a true lender the broker could never fund your loan. Any letter from a broker is only a letter of intent. This is true with an SBA approval as well. If the bank doesn’t approve it, the SBA will never fund your loan by itself.
• What does the letter say? Is this an outline of the loan IF they approve it, or is this a firm commitment from the lender? Review the language carefully so you know what you have. Don’t make decisions to move your project forward if the letter you have doesn’t give you the confidence you need.
• If it’s not in writing, get it in writing? A lender is not committed to a loan unless it is in writing and on their letterhead. Make sure you see it. I’ve only run into one lender that prefers not to put their commitments in writing. This lender is an exception to the rule.

I have seen letters of intent, proposals, conditional approvals, commitments and email’s that outline the terms and structure of a commercial loan. Some of these letters will appear as if the lender is committed to funding your loan when in actuality they are not.

A letter of intent, proposal or email with the terms of the loan is NOT an approval that the lender will fund your request. Initially it is a way for the lender to see if the target rates and terms are agreeable to you. Some lenders will only hold a verbal discussion around these items to make sure they don’t set a false expectation. These letters may have an expiration date on them, but they don’t really expire.

A conditional commitment or commitment letter will clearly say your loan is approved and may have some additional checklist items or due diligence that must be completed. Normally, the due diligence items/checklist include appraisals, title work, or other documents they need you to submit. This letter means the lender is ready to fund your deal as soon as the conditions outlined are met. This is a true commitment letter. This you can hang your hat on, but it does expire.

Many lenders will not issue loans to borrowers who are leasing the land if the improved structure is the only collateral. When considering real estate we can certainly empathize with them. It would be hard to have a loan on a building that couldn’t be moved if the lease were to expire or default.

There are lenders who get comfortable with these land lease arrangements. They can be rare to find, even if you are an exceptional borrower. Dealing with land leases when you are purusing a commercial loan is another reason to work with a commercial loan broker. Through experience working on a range of deals, they know which lenders will work with you and your land lease.

Don’t spend months and months with a lender only to find out they can’t issue your loan because of a land lease. Let’s get to work right away.