1. Paying a loan brokerage firm too much money upfront without a loan approval in hand
Fee Policies
Each firm has a different policy. Beware of those who charge the entire fee upfront without an actual loan approval. At Key Commercial Capital we take it a step further. It is our policy to wait until an official underwriting approval is obtained BEFORE any fees are charged to the client. This is a bit risky on our part because often times we provide a lot of assistance and spend a hefty amount of time with a borrower who might change his or her mind about something. Rather than collect too high a fee upfront and then have to be concerned with returning a portion of the fees we just wait until the underwriting approval is in hand prior to invoicing the client for our work. Additionally, when comparing our fees to other firms, borrowers will find that ours are quite a bit lower than others. We hope each client feels that we go the extra mile and earn every dollar of the fair fee we charge once their official business loan approval is in hand.
2. Assuming that a “pre-approval” on a loan is a “done deal” and paying a deposit or the entire franchise fee to a franchisor BEFORE getting an underwriting approval (commitment letter) from a lender.
It is wise to get a commitment letter from a lender before making promises, paying fees or signing legal documents. It is surprising to see how often this happens and how difficult and stressful it is on individuals and their families. The correct order of things is to secure financing first before moving forward on any business project that requires a large amount of funds. Key Commercial Capital will work hard to find a lender to get your loan underwriting approved with a commitment letter in your hands before you make commitments of your own.
3. Signing a lease before securing financing
SBA Landlord Waivers and Lease Terms
It is also important to note that the SBA has certain requirements in place with respect to landlords and lease agreements. A landlord consent form can be required and the lease should be written in such a way that it allows the business owner to be able to renew the lease for the term of the loan. If the loan term is 10 years, the lease agreement should provide the option to renew the lease (if the business would like to stay) for the term of the loan. This does not mean that the business must stay in the location. It means that the landlord must offer the lease extension to the business if they WANT to stay. It could be detrimental to a business if a landlord forces the business to move and possibly create a situation where it has no place to operate. This scenario is one that the SBA and the lender do not want. If a business cannot operate and generate revenue it may have difficulty making its loan payments. For this reason the SBA and the lender will require that the landlord allow the business to stay for the term of the loan.
If the lease is signed too early it is possible that the landlord may refuse to comply with the SBA requirements. This puts the lender and the borrower in a bad situation. Sometimes requirements can be waived, but other times they cannot be waived. It is best not to risk having issues during closing and to wait on signing lease agreements until requirements are fully understood and financing is secured. Your representative at Key Commercial Capital will be able to answer specific questions about SBA requirements surrounding landlord waivers, consent forms and leases. We are prepared to guide you through the requirements to make the closing process as smooth as possible.
4. Making large purchases using personal credit and changing the debt to income ratio on a file before loan closing
Good lenders who have provided a commitment letter usually are indeed committed to the loan. Minor changes normally do not create problems when it is time for final closing. Good underwriters usually provide a cushion for unexpected changes that might occur during the time between approval and funding. However, if major changes occur the lender may be forced to pull back and refuse to fund the loan.
If there is question about changing anything with respect to income or borrowing funds to make large personal or business purchases it is best to ask before doing. Your representative at Key Commercial Capital will always be available to answer questions about situations that might compromise a loan in process. It is a priority for us to be there to help guide you through the closing process. We do not simply assist borrowers to get an approval and then disappear. We are committed to your file from start to finish.
5. Using personal funds and/or personal credit for the business
Although the individual obtaining an SBA loan is a guarantor of the loan, the loan will not appear on the personal credit report. Essentially the business is the borrower, which helps build the credit of the business and does not affect the personal credit of the individual guarantor. It is wise to build business credit and to keep personal finances separated from business finances. It is surprising how many people use personal credit cards and personal loans to fund a business. This can be detrimental to personal credit and can disqualify a borrower for an SBA loan. The personal debt to income ratio should be below 40% to qualify for an SBA loan. If personal credit cards are used to finance the business, they cannot be considered in a refinance. An SBA loan being utilized to refinance debt can only consider debt that is in the name of the business and not the personal name of the individual owner of the business. It is tempting to utilize personal credit cards when cash flow gets tight or when the business is just starting out. Business owners may not know about special financing options that are available, or they might think their file would not qualify for business financing. Key Commercial Capital would be happy to discuss the options that are available before a business owner incurs or increases personal debt for the business.
6. Under capitalizing the entire project from the start
Building business credit
Additionally, once the new business has been generating a good amount of revenue for six months to one year it is a good idea to set up a business line of credit. Lines of credit are a way of supplementing cash flow for short periods of time. As the line of credit is used and paid back the lender will usually increase the line. Lines of credit should only be used for short periods of time to avoid compounding interest. If a business owner does not foresee being able to pay back the line of credit in 1 to 3 months it might be a good idea to consider a second SBA loan. If a borrower qualifies, a second SBA loan is acceptable if the borrower waits 90 days in between the closing of one SBA loan and the application for another one. Key Commercial Capital can help your business get set up for a line of credit and can advise you on the options and qualification requirements for additional loans. We are happy to present information about all of the options so that you can make a well-informed decision.
7. Paying extra to secure additional territories to be developed later (after location 1) and expecting to get equity credit (credit toward down-payment) for funds used toward this expenditure
Equity credit for the franchise fee
Some franchises require a 3 pack or 5 pack to be purchased with the initial franchise fee. Borrowers need to realize that the funds paid toward extra locations will not ALL count toward the required equity injection for location 1. If for example the franchise fee for location one is $30,000 and extra development rights for 3 locations cost another $30,000. The borrower will only get equity credit for the franchise fee and the portion of the extra fee for location 1 ($10,000 in this case). The remaining $20,000 will be usable as equity credit in the amount of $10,000 for location 2 and the remaining $10,000 for location 3. Unless the business is opening 2 or 3 locations all at ONE time, the equity credit is split up across the time is takes to open each location.
Deal structuring
It would be wise to discuss options and to plan ahead for the qualification requirements that will be necessary BEFORE using funds to purchase the rights to extra territories. Key Commercial Capital will be happy to work with borrowers to help plan accordingly. If the fee for development rights of extra territories or locations will be detrimental to a loan, it would be a good idea to negotiate something with the franchisor about paying for the rights to open extra locations after the loan for location one is closed and funded. This may or may not be allowed by the franchise. It is best to have these discussions ahead of time to avoid disappointment, delays and frustration.