Commercial Financing in Alberta: What Happens After Your Loan Is Approved?
Written by: Roshan Kalra, Co-Managing Partner
Receiving an approval for a commercial loan is an important milestone for any business owner or commercial property investor. But an approval or signed commitment letter does not necessarily mean the funds are ready to be advanced.
Before a lender advances money, there are typically a number of legal, financial and due diligence requirements that must be satisfied. Understanding this process (and involving your lawyer early on) can help avoid delays when it comes time to fund your acquisition, refinance or business transaction.
The Commitment Letter Is the Starting Point
Once financing is approved, the lender will typically issue a commitment letter setting out the basic terms of the loan, including the amount, interest rate, repayment terms, security and conditions that must be satisfied before funding.
Borrowers should carefully review the commitment before signing it. Particular attention should be paid to matters such as:
guarantees required from shareholders or related companies;
prepayment rights and penalties;
financial covenants and reporting requirements;
lender fees and costs;
environmental or appraisal requirements; and
any conditions that may be difficult to satisfy before the proposed closing date.
For significant transactions, having legal counsel review the commitment letter before it is signed can help identify issues while there is still an opportunity to negotiate them.
What Security Will the Lender Require?
Commercial lenders will generally require security over some or all of the borrower's assets. The security package will depend on the transaction but may include a mortgage over real property, a general security agreement over personal property, an assignment of rents and leases, guarantees and postponements of shareholder or related-party debt.
Where multiple companies are involved, the lender may also require guarantees and security from related entities.
It is important for borrowers to understand that these documents can give the lender significant rights if the loan goes into default. The terms should therefore be understood before the financing is completed.
Why Are So Many Searches Required?
A borrower's lawyer will often be required to conduct searches and provide the lender with an opinion confirming various matters relating to the borrower, guarantors and property.
Depending on the transaction, searches may include Land Titles, Personal Property Registry (PPR), corporate registry, bankruptcy and insolvency, Bank Act and litigation searches, together with municipal tax, zoning or other property-specific searches.
These searches allow the lender to confirm matters such as ownership of the property, the existence of competing security interests and whether there are other issues that could affect its security.
If an existing mortgage, security interest or other registration must be discharged, this also needs to be addressed as part of the closing.
Property Due Diligence May Also Be Required
For loans secured against commercial real estate, lenders frequently require additional property-level due diligence.
Depending on the property and lender, this can include an appraisal, environmental site assessment, building condition report, real property report, municipal compliance information and evidence of appropriate insurance.
For income-producing properties, the lender may also require copies of leases, rent rolls, tenant information and assignments of rents.
A significant issue discovered in one of these reports can affect the lender's willingness to fund, or result in additional conditions being imposed before the advance.
Existing Lenders and Payouts
If the new financing is being used to refinance existing debt, the existing lender will usually need to provide a payout statement.
The borrower's lawyer then coordinates the repayment of the existing loan and obtains the necessary discharges of the existing mortgage and other security.
This can become more complicated where there are multiple secured creditors, equipment financing arrangements, shareholder loans or other registrations against the borrower or property. Identifying these matters early can prevent them from becoming last-minute closing issues.
Corporate Authorizations and Legal Opinions
Where the borrower is a corporation, partnership or other entity, the lender will generally require evidence that the financing and security have been properly authorized.
Legal counsel may be required to review the borrower's organizational documents, prepare directors' or shareholders' resolutions and provide a legal opinion to the lender confirming matters such as the borrower's existence, authority and the enforceability of certain loan documents.
For more complicated corporate structures, this process should begin well before the proposed funding date.
Corporate borrowers should ensure that they maintain an up-to-date minute book in order for their legal counsel to be able to provide a legal opinion. This is often a common cause of delays in completing financing.
Insurance Is Often a Closing Condition
One of the more common last-minute issues in commercial financing is insurance.
The lender will typically require evidence that appropriate insurance is in place and that the lender has been properly noted on the policy. The exact requirements will depend on the property, business and loan documents.
Borrowers should send the lender's insurance requirements to their insurance broker early rather than waiting until the day before closing.
Why Timing Matters
Commercial financing involves coordination between the borrower, lender, lawyers, accountants, insurance brokers, appraisers and other consultants. A delay involving any one of these parties can affect the funding date.
This becomes particularly important when financing is tied to a commercial property acquisition or another transaction with a firm closing date. The fact that a lender has approved financing does not necessarily protect a purchaser if the lender is unable to fund on closing because its conditions have not been satisfied.
The Bottom Line
Commercial financing is more than simply negotiating an interest rate and signing a loan agreement. The lender needs to confirm that its borrower, security and underlying transaction satisfy its requirements before it releases its funds.
Starting the legal process early can identify problems, allow sufficient time to satisfy lender conditions and significantly reduce the risk of a delayed closing.
At SB LLP, our commercial lending team regularly acts for both financial institutions and borrowers in commercial financing transactions throughout Alberta. Our experience acting on both sides of lending transactions allows us to anticipate lender requirements and help borrowers navigate the financing process efficiently.
If you are obtaining financing for a commercial property, business acquisition, construction project or other commercial transaction, contact a member of our Commercial Lending team early in the process to help ensure your financing is ready when you need it.
