By Parag Nevatia
It’s amazing to see how people make this common mistake over and over again. Even worse is to see, more and more people doing this. What I am talking about is the absence of discussing a purchase transaction with a lawyer and avoiding some nightmares waiting to happen. Why do some buyers make contracts or letters of intent without legal guidance? What if some unforeseen issue pops up and the process gets delayed?
Days become weeks, and weeks become months and suddenly the buyer faces a horrific nightmare, their down payment gets forfeited or donated to the seller. As an ex-banker, I have seen this a few times, and it shocks me and at the same time, I empathize with those who seem to not know better because they never get the guidance prior to setting off in the wrong direction.
Sellers seem to be in such a rush to sell so they encourage the buyer to take a seller’s note instead, as they know a bank would probably not finance the project because of an obvious weakness in cash flow. Yet the sale price is usually set much higher than what the cash flow can support. I’m sure my banker colleagues will agree with this.
Before the loan approval
The problem is buyers don’t seek enough legal guidance to protect their deposit. First that deposit should stay in an attorney trust account. Second, a legal intent to purchase or a purchase contract should be drafted with a calculated amount of consideration payable to the seller, if for some reason, the buyer is unable to obtain financing.
There is a difference between greed and taking advantage and in such situations, and those buyers are often pressured into signing to buy, giving them absolutely no time to get to an attorney. I have personally experienced this jaw-dropping problem a few times. Buyers should know that this is just the beginning of a mistake that would later on become a bigger problem – almost always, especially in this economy and credit environment.
No cash flow = no financing from a bank = seller financing at a price much higher than what the cash flow can actually support. This is a recipe for stagnancy. I didn’t say disaster because in many cases buyers have sought seller financing on cash-based businesses and it may have worked for them on a few occasions in the short run but eventually this catches up and buyers realize they didn’t really move front there starting point even after years.
There is no hope for growth in this scenario. Money makes money! Spend that money and get legal guidance as opposed to losing that deposit.
After the loan approval
Next huge issue I have seen over and over again (and it’s not funny) is the continuing problem of a client not seeking legal guidance or the right legal guidance to close a Small Business Administration (SBA) loan. Huge mistake! Every attorney says they can close a business transaction. Agreed, but an SBA loan is a completely different animal than a conventional loan.
There are SBA regulations that non-SBA attorneys have not read and are not aware of, which results in too many questions being asked during the closing stage, ultimately causing a delay in closing, not to forget, everybody suddenly seems to be taking vacations invariably during this closing stage. On a serious note, I tell my clients, and most of my banker colleagues may agree, that most delays caused in post- approval stage, usually come from not hiring an attorney who is well versed with SBA regulations.
It is better to hire an attorney who knows SBA when you are seeking an SBA loan. Ask around. Interview a few different SBA attorneys to see who you get comfortable with. Nothing wrong with options – that’s why there are so many of them around. It’s important to get the right legal guidance before running into a problem. Unfortunately some learn this after the fact.
SBA lending is a niche and is important for the revival of our economy as trillions of dollars have gone into funding small businesses since the recession. Fiscal year 2013-14 saw $17.9 billion in 7a funding over 46,000 loans and $11.7 billion in 504 loans. More details can be obtained from the link below: https://www.sba.gov/blogs/another-strong-year-sba-lending-fy-2013
After a successful career in Commercial Banking and Lending in the New Jersey-New York region, Parag Nevatia founded EZ Funding Solutions LLC with a vision and desire to improve the quality of business credit in the market.
Being certified by the National Association of Government Guaranteed Lenders (NAGGL) that governs the SBA Program nationally, he has the advantage of performing credit and risk analysis, developing creative solutions to overcome obstacles and mitigate those risks, structure debt correctly, and then underwrite a project or loan – all upfront, before presenting it to the right lender who has the appetite to finance the project.
Additionally, Parag serves on the Middlesex County Advisory Board of the Small Business Development Corporation at Rutgers University where he conducts monthly seminars and webinars on “Lender Scrutiny.” He also serves on the Middlesex County Regional Chamber of Commerce Ambassador Committee.
Editor’s Note: Read a new article by Parag Nevatia every Thursday.