In the complex world of business loans, particularly those backed by the Small Business Administration (SBA), it's crucial for borrowers to be equipped with independent legal counsel. Many borrowers mistakenly rely solely on the lender's attorney, assuming their interests will be adequately protected. However, there are significant reasons why having your own attorney, separate from the lender's counsel, is essential for navigating the SBA loan process effectively.
1. Conflict of Interest.
The primary concern with using the lender's attorney is the potential conflict of interest. Lender-provided attorneys are inherently focused on protecting the lender's interests. While they may outline the loan terms and legal implications, their loyalty lies with the lending institution. This conflict can leave borrowers vulnerable, as their specific needs and concerns might be overlooked or downplayed.
2. Understanding the Borrower's Needs.
Having your own attorney ensures that someone is solely focused on understanding and advocating for your interests. A dedicated attorney can take the time to review the loan documents thoroughly, explain complex legal jargon, and negotiate terms that align with your business goals. Borrowers often have unique circumstances that require personalized legal advice, which may not be adequately addressed by the lender's attorney.
3. Transactions Connected to the Loan.
In addition to the loan, borrowers are often buyers or tenants in connection with an asset purchase agreement, member interest purchase agreement, real estate purchase and sale agreement, or commercial lease agreement which is the basis for the SBA loan to begin with. The lender’s attorney will not represent the interests of the borrower as a buyer in such transactions, which can leave the buyer / borrower exposed if it doesn’t hire competent attorneys.
4. Saving You Money.
While hiring your own attorney adds expense to a transaction, the role of a competent attorney is to also find ways to save you money in the transaction. For example, most borrowers don’t know that requesting for your attorney to conduct the required lien and judgement searches on the borrower and the guarantors to the loan can save them hundreds to thousands of dollars. SBA lenders outsource these searched to third-party companies that often charge more than a competent attorney would charge for the same search services.
Real estate is often involved with SBA loans, whether as the acquisition subject, or as collateral to support the SBA loan. In either case, you must have your own attorney, as an Opinion of Title is required for a title insurance company to issue commitment to your SBA lender. If you are acquiring property, you will need the assistance of an attorney from the contract to closing phase. Often, SBA lenders will ask you to use their affiliate title company; however, competent attorneys have working relationships with title companies that leverage that relationship for better service and response times, which ultimately save you even more money.
A closing agent is often required to close an SBA loan, some SBA lenders will provide these services to you, but their fees may be higher as a result, especially since the SBA lender’s attorney will need to be involved in that process and the SBA lender’s attorney is paid for by the borrower. Some SBA lenders do not offer these services, which requires a borrower to find a closing agent, which can be costly. Closing agents are neutral third parties who do not represent any party to the transaction, they are simply facilitating the signing of all documents and disbursing funds. As mentioned earlier, where real estate is involved, not all lenders or third-party closing agents are equipped to file deeds of trust, assignment of rents, or other legal recordable documents connected with the transaction. Having your own independent attorney ensures that your closing is done properly and efficiently, which ultimately saves you money.
5. Compliance and Due Diligence.
SBA loans involve intricate compliance requirements and due diligence processes. Having your attorney guide you through these complexities can prevent costly mistakes and legal issues down the road. From verifying the accuracy of loan documents, ordering due diligence items such as certificates of existence and tax clearance certificates, having your own attorney can significantly speed up the SBA loan and overall transaction process. This allows a borrower to obtain loan funds faster, reduce costs from prolonged lender engagement, and enter into / begin business much faster.
Conclusion
While it might seem convenient or a cost savings to rely on the lender's attorney when obtaining an SBA loan, the potential risks far outweigh the benefits. Borrowers need their own legal representation to ensure their interests are prioritized and protected throughout the loan process. Investing in independent legal counsel is an essential step towards securing a loan agreement that aligns with your business objectives and safeguards your financial future. By partnering with an attorney who understands your unique needs and challenges, you can navigate the complexities of SBA lending with confidence and peace of mind.