Funding your Business through a Commercial Loan

If your business needs an infusion of capital, one option worth exploring is a commercial loan.  A commercial loan is a loan that comes from a financial institution – usually a bank. I have found that clients often don’t know what to expect from the commercial loan process. If your business is considering borrowing money from a bank, the information below will help prepare you for the journey you’re about to undertake.

Taking out a commercial loan takes a long time. Unlike most consumer loans, which take comparatively little time to close, the commercial loan process often takes months to complete. Why? Some of the reasons are explained below. The bottom line is that due to the amount of money being borrowed and the risk profile associated with this type of debt, banks must be selective about the businesses to which they provide loans.

Be ready to provide lots of information about yourself and your business. The first time you go through a commercial loan transaction, you’ll likely be shocked at the volume of information the bank will require you to provide. The lender will require you to produce detailed financial statements, a thorough list of assets and equipment, copies of tax filings, details about past, pending, or threatened litigation, copies of important contracts and leases, proof of various forms of insurance, and much more.

You’ll most likely have to personally guarantee the loan. A personal guarantee (sometimes spelled “guaranty” in loan documents) is an agreement under which you promise to become personally liable to repay the debt of your business. Most businesses don’t have sufficient assets or credit history on their own to avoid having the owners personally guarantee their obligations. Nobody likes signing a personal guarantee because business failure rates are high and becoming obligated to repay potentially millions of dollars would be financially devastating for most people. Nevertheless, personal guarantees are routine in commercial loan transactions and most banks wont loan money without them.

Everything is negotiable. Keep in mind that a commercial loan transaction is (among other things) a contractual relationship between two parties. The volume of paperwork that must be executed in order to close a commercial loan is sometimes staggering. The legal language contained in all of those documents governs the rights and obligations of the parties, and was most likely boilerplate wording drafted to afford the highest level of benefit to the bank. But each situation is unique, and there may be provisions buried within those documents that don’t accurately reflect the intent of the parties. Read each document carefully and don’t be afraid to ask for changes.

Nothing is negotiable. The problem with asking for changes is in most cases it wont do any good. In almost every commercial loan transaction the bank has a much better bargaining position than the borrower – you need them way more than they need you. Also, because banks are in the business of making loans, they want the language in each loan document to be consistent from one deal to the next because it greatly simplifies internal policy making and enforcement when there is a default. For these reason, banks are reluctant to customize commercial loan documents.   

In summary, when engaging a lender in discussions about a commercial loan, you should be prepared to be patient and get comfortable with the fact that the bank has the upper hand. Have competent, experienced legal counsel review the documents and explain them to you. Don’t be afraid to ask for changes to the documents, but also don’t expect the lender to agree to many of them.

Bear in mind that the decision of whether to borrow money, just like any other business decision, is a risk/reward analysis. There can be significant risks (such as personally obligating yourself to honor your company’s debts), so make sure you have a solid plan for the use of the funds and repayment of the loan.

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