Retainer fees are \”standard business practice\” for some (but not all) commercial loan situations. It is understandable that a commercial borrower would rather not pay such a fee, so it is important for a commercial borrower to understand when it is more likely to be necessary. In fact a business loan retainer will not be necessary in many business loan scenarios. This is especially true of commercial financing such as business cash advances that takes less time and produces funding within just a few days.

For more time-consuming commercial loan processes, it is increasingly common for a retainer fee to be paid during the preliminary stages. This is especially true when working with business loan consultants that specialize in commercial loans. Most advisors who work with residential mortgage loans (and perform commercial loans as a sideline to their main business activities) will not charge a retainer fee because in many/most instances they are legally prevented from doing so by certain state and federal regulations (in other words, it is likely that they too would charge a retainer fee if not legally prohibited from doing so because of prevailing residential loan compliance issues).

So why wouldn\’t a commercial borrower who doesn\’t want to pay a retainer fee simply work with someone who doesn\’t charge a retainer fee? Many commercial loan situations are too difficult for the average residential loan advisor to handle successfully. Similar to a person seeking a more expensive medical or legal specialist to help them when confronted by a serious medical or legal problem, most commercial borrowers have come to realize that business loan problems are frequently just as serious and complex and deserving of a commercial loan specialist.

It is in these situations when a commercial borrower is working with a business loan specialist that a retainer fee should be viewed as \”standard business practice\” for more difficult and time-consuming commercial loans. I have stated elsewhere that one of the most important lessons to be learned from a thorough analysis of commercial financing \”trade-offs\” is that the lowest rate is almost never associated with the best deal for the commercial borrower. A similar observation based on over 25 years of business loan experience: the lowest fees are also rarely associated with the best deal for the commercial borrower.

The fees charged by commercial loan specialists (including retainer fees when appropriate) are almost always higher than loan advisors who do not specialize in business loans. In the end, most of these borrowers still choose to deal with a highly-qualified commercial loan specialist because they ultimately realize that perhaps it is better to use the \”best\” business loan advisor rather than the \”cheapest\” business loan advisor.

The most typical range for commercial loan retainer fees is $2500 to $10,000 (obviously a wide range). There are various reasons for a retainer fee and here are three of them: (1) to compensate the advisor for some of the initial loan processing; (2) to serve as a \”good faith\” deposit toward the overall commercial financing fees; and (3) to focus the borrower on working with one business loan advisor. The third reason might be the most important of all. With difficult commercial loans, it is extremely counterproductive for a commercial borrower to be working with multiple business loan advisors (regarding the same loan). Once a retainer fee has been paid, a commercial borrower is likely to be more comfortable in working solely with the business loan advisor who received the retainer fee, and with difficult commercial loans, this unified approach is likely to be more successful. It is this success that ultimately justifies the retainer fee.

Copyright 2005-2006 AEX Commercial Financing Group, LLC. All Rights Reserved.

Writen By : Stephen Bush

Tags: business loan, commercial financing, commercial loan, Commercial Mortgage, commercial real estate loan

It is important to have an understanding of what can go wrong with a business loan. The focus of this article is on two situations that will have the most severe financial consequences. A loan disapproval at an early point in the application process is not included here because it is not likely to have the immediate financial consequences of the examples provided below. Business owners should be prepared in advance for these problematic circumstances so that they can develop contingency plans.

RECALL OF A COMMERCIAL LOAN

Recall provisions allow the lender to call the loan (forcing the borrower to repay early) prior to the expiration of the loan. This issue is not of concern to commercial borrowers whose business loan does not contain provisions permitting the lender to recall the loan. However many traditional commercial lenders routinely place recall clauses in their loan agreements. The conditions which can trigger a recall will vary but will commonly include periodic review of financials and credit history by the lender. Under these circumstances if agreed levels of income and credit standards are not met, then the bank will typically notify the commercial borrower that they must pay off the loan within a 30-90 day period.

When confronted with a recall notification, commercial borrowers will have little recourse other than to seek refinancing from another lender. In seeking alternative sources of commercial financing, prudent borrowers will eliminate potential lenders who will impose similar recall provisions in new financing. To avoid the recall situation in the first place, commercial borrowers would be wise to consider only commercial loans which will not have recall terms. For commercial borrowers who currently have recall provisions in their commercial financing agreement but have not yet received a recall of their loan, it will be equally wise to consider refinancing their business loan before such a recall occurs so that refinancing is accomplished according to the commercial borrower\’s timetable and not that of the current commercial lender.

COMMERCIAL PROPERTY APPRAISAL COSTS AND RESULTS

The commercial appraisal process is lengthy, expensive and relatively uncontrollable in terms of results. Commercial mortgage appraisals will be more expensive for specialized commercial properties such as assisted living facilities. Appraisals for a stated income loan will usually be more costly because the lender is primarily depending on credit scores and a thorough appraisal to support the loan. Commercial appraisals are like to cost more for commercial properties in rural areas because qualified appraisers may not be available locally. The timetable for completing an appraisal is another potential source of problems, and until the appraiser is selected and commits to a schedule, the completion date is not likely to be known with any degree of accuracy (and this issue alone can result in a longer processing period for the loan).

Even though cost and schedule are critical issues, an even bigger issue is the appraisal value that is provided by the appraisal. It is certainly not unusual to receive an appraisal that produces a value that is less than the commercial borrower expects. A similar (but avoidable) problem occurs when a commercial appraisal is not accepted by the lender because the appraiser did not provide an appraisal meeting basic guidelines. As one example, a key element of a commercial appraisal is the valuation based on analysis of income. If an appraiser chooses to submit an appraisal based only on comparable sales data even though the lender stipulated in the engagement letter that an income appraisal is required, then the lender will not accept the appraisal (and is likely to refuse a modified report including the missing data from the appraiser when they violate such a basic appraisal requirement).

It is extremely important to realize that there might be significant assets which will not be included in the value. Items such as equipment and furniture are frequently excluded, especially in commercial real estate loans. For businesses such as funeral homes and assisted living facilities, it is very common for the overall business value to be much higher than the real estate value. But an appraisal based on the real estate value will nevertheless exclude the excess business value from the commercial real estate value.

What contingency plans are advisable for the appraisal process? First, be prepared for the appraisal to be more expensive than initially expected and ensure that funds are available to cover this possibility. Second, be prepared for the appraisal to take longer than expected. If buying a business property, the buyer should discuss this possibility in advance with the seller. If refinancing, the owner should not make plans for spending funds until the appraisal has been finalized and the lender indicates their readiness to close the loan. Third, consider in advance what action to take if the appraisal produces a lower value than expected. Fourth, decide if an additional appraisal is warranted (this possibility needs to be considered especially for the situation in which the appraisal is not accepted by the lender).

Copyright 2005-2006 AEX Commercial Financing Group, LLC. All Rights Reserved.

Writen By : Stephen Bush

Tags: business loan, commercial financing, commercial loan, Commercial Mortgage, commercial real estate loan