Instruments & Conditions of Commercial Finance
Here is a chronological presentation of some major documents and conditions which are --
- often unexpected (the application stage)
- poorly understood (the closing stage), and
- frequently forgotten (the post-closing stage).
The role of Independent Mortgage & Finance (IMF) is to assist you, the borrower, obtain finance that is tailored to your needs, not to the lender's interest.
A. Application (The Start)
- Individuals (any 10% or greater owner)
- Business Plan
- Other Documents
a) Personal Financial Statement (P.F.S.) -- current, signed, complete.
b) U.S. Individual Income Tax Form 1040 - 2 full years plus year-to-date (y-t-d) income.
c) Tri-merged credit report - Lender will obtain but borrower should have a median score above 720.
a) Who with what experience will achieve the stated goals? When? Cost? Return?, Resumes of managers.
b) If purchase, copies of seller's business tax returns for past 3 years plus current y-t-d profit & loss (P&L);
Contract of sale; Survey.
c) If refinance - same forms plus all 3 current financial statements (P&L, Balance Sheet, Cash Flow).
a) All property (fire, flood, windstorm) & liability policies.
b) Occupational licenses.
c) If applicable, verification of paid Florida sale's tax.
d) Articles of Incorporation or Organization of buying/borrowing entity.
B. Closing Stage (Look before it's too late.)
1) Owner's written agreement on duties, distributions, procedures for buying departing owner's shares.
2) Mortgage: Between lender & borrower (owner), this is the basic contract that is recorded in the public records.
It and its akin documents (Business Loan Agreement) recite borrower representations and detail obligations as
affirmative covenants (maintenance & access to financial records; Debt Service Coverage (DSC), insurance, etc.).
3) Promissory Note: Recites financial particulars (amount, future lending, rate, term, index, adjustment periods). Often
not recorded. May be signed by parties other than owner.
4) Guarantee: Separate promise to repay. May be joint & several liability or % and $ liability for a period less than term.
5) Financing Statement: Liens all FF&E, trademarks, patents, copyrights, domain & trade names as additional surety.
Usually filed in public records of county and state.
6) Cross Default (2 or more loans) & Cross-Collateral (2 or more sets of collateral).
C. Post Closing (Things To Remember)
1) Annual and perhaps quarterly P&L on business.
2) Maintenance of specified Debt Service Coverage (DSC).
3) No subordinate finance without first mortgagee's approval.
4) Adequacy of property & liability insurance, including maximum deductibles.
5) At least, annual personal & business tax returns.
6) Prepayment Limitations: Unlike residential mortgages, commercial mortgages can be closed to prepayment.
If allowed, usually lender retains any "bonus" if repaid funds can be re-lent at higher rate. If they can be re-lent
only at lower rate, then repaying borrower will have to indemnify lender for the loss. Often a loan that adjusts
daily or monthly with a variable index has no penalty. Usually, a fixed rate will impose a prepayment penalty.
7) Loan Agreement that survives closing (Standard printed documents - Laser Pro).