The SBA Guaranteed Loan Closing Process - Guidelines to Follow, Pitfalls to Avoid
It's an exciting time for you. You are thinking of starting or purchasing your own business; being your own boss; sailing your own ship. If you are thinking of funding your start-up, asset purchase or improvements with an SBA (U. S. Small Business Administration) Guaranteed Loan, I highly recommend that you hire your own lawyer, with SBA knowledge and experience; and have her involved in the deal even prior to entering into a purchase or other contractual agreement. To avoid conflicts of interest, choose an attorney that is not in any way associated with or recommended by the bank, anyone working with the bank, the broker or anyone else involved in your loan transaction.
Quite often, to keep costs down, many people opt to make their way through this process on their own, meaning without their own SBA lawyer. Note that the bank's attorney, SBA personnel and the business or real estate broker are not looking out for your legal rights or your best interest. Therefore, should you choose to handle this process on your own, here are a few guidelines to follow and pitfalls to avoid. Please note that this list is not exhaustive or inclusive, but it includes some of the major issues to watch out for.
Have "hands-on" experience in the industry. If you have never worked in a sandwich shop or the pet grooming industry and these are the businesses you are considering as possible business venture, go work in one for at least six months to see what running that type of business will entail, and also to see if you will like the line of work. It doesn't matter that the seller or the franchisor will provide so many weeks of training or that you are bringing on a manager who has worked in the industry. It's your business. You need to know the "ins and outs" of it, as well as whether you will really enjoy it.
Do your own "due diligence" investigating the business you are purchasing. Have an accountant or certified financial advisor review the financials, corporate records and business documents of any business you are looking to purchase, as well as their affiliates. You need to see three years of historical figures (tax returns, profit and loss statements, balance sheets) as well as interims from the last year-end up through the most current month, a current list of liabilities, including long-term and short-term debt, and the personal financials of all owners and officers. The bank will be looking at all this too, but it is your money, so you need to conduct your own independent financial analysis. The bank will have to provide to SBA a "business valuation" but that may or may not be done correctly or to the extent necessary and, if they're wrong, you suffer the consequences. Believe me. I've seen it happen!
Unless you want responsibility for all the liabilities of the business, including future or pending lawsuits/judgments against the company, etc., make sure you only purchase the assets of the business (and goodwill if applicable), not stock. This is important because, if you're not careful, you could be closing your new business venture one day and your doors the next.
Think carefully before agreeing to pledge virtually all of your assets as collateral or including your spouse, parents, children, etc., as personal Guarantors on the debt. SBA has specific requirements as to which individuals must personally guaranty the loan and then the bank adds their own requirements for credit reasons (to approve the loan). Negotiate these terms with the bank, the way you would your interest rate, before you sign the commitment letter.
Make sure the closing documents reflect everything you and the bank have agreed to. Usually the closing documents will state that they supersede all prior agreements, meaning you can't go back to what you and the loan officer agreed to early on in the deal, even if they put it in writing. Tell the closing attorney to send the closing documents to you in advance so you can review them carefully and be sure to read every document thoroughly. If the closing attorney doesn't have them ready in time to send them to you before closing day, get to the office early and take the time you need to review them carefully. The Promissory Note and Mortgage, as well as any Personal Limited or General Guarantees, are your key documents, but all are extremely important. READ BEFORE YOU SIGN. Ask questions and get good and acceptable answers. If the document isn't clear, have language added or modified make it clear.
Again, this isn't a complete list of everything you need to know when closing an SBA loan, but it's a start and hopefully helps a bit. All loans are different, with various requirements and certain circumstances. It is virtually impossible to list here everything you need to know and all the problems you could encounter. That is why a good SBA lawyer is crucial in the closing process. I have always been surprised at how few borrowers engage their own counsel for closing, but never surprised, when things go wrong and they wish they had. You are putting a lot of money out for this venture, hiring a good SBA lawyer is money well spent.
Please note that I am an attorney, with 15 years in SBA lending, both with the SBA and with the banks and I am licensed to practice law in the State of NY only. This legal guide is not legal advice and should not be relied on as such. It is for informational or educational purposes only. Each state has different laws, each situation is fact specific, and it is impossible to evaluate a legal problem without a comprehensive consultation and review of all the facts and documents involved. This legal guide does not create an attorney-client relationship or privileges.