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September 7, 2016

Best Practices: When Should Borrowers Engage Legal Counsel

by Katherine D. Tohanczyn

Before, during and after the commitment phase on any loan, your client will undoubtedly have numerous questions about the process, costs, and time-frame for closing the loan. One common question is whether the borrower should engage an attorney to assist with the loan closing process. Ultimately, only your clients can decide whether they need an attorney, but this article provides some guidance on how lenders may respond to that question.

Borrower’s counsel can help get things done quickly. A common misperception is that when a borrower engages counsel, the attorney will delay the closing process. In most cases, the opposite is true. Experienced counsel can assist with creating corporate documents, registering the business with appropriate state and local officials, and advising on business licenses, insurances, and contracts needed to operate the business. Additionally, counsel can move quickly to address legal questions posed by both the borrower and lender, and provide documentation necessary to fulfill checklist needs and meet closing deadlines.

Borrower’s counsel can help get things done right. If your borrower is starting a new business, an experienced corporate attorney can be a cost effective investment. Unless the small business owner is experienced in starting a new business, often the cost-saving measures by Do-It-Yourself legal work ends up taking longer, and needs to be redone and repeatedly reviewed. The delays and mistakes end up costing the business owner both time and money, and frustrating everyone involved with the closing process.

Borrower’s counsel can protect the borrower’s interest against third parties. If your borrower is looking to purchase a business, a business attorney can protect their interests and be sure that proper due diligence is done so that the business is legally transferred to the borrower free and clear of liabilities, and at a fair price. While lender’s counsel may also be reviewing borrower’s purchase documents, it’s important to remember that lender’s counsel is not reviewing the documents for borrower’s best interests. Lender’s counsel cannot provide legal advise or represent a borrower in its negotiations with any parties on any transactional documents.

Finally, it is always advisable for the borrower to review and discuss loan documents with counsel prior to closing. This is helpful to both the borrower and the lender, as the borrower will be made aware of its obligations and rights under the loan documents and can ask any questions before the closing occurs.

Bottom line is that by engaging an experienced transactional attorney, loans often proceed more smoothly, which may save the borrower both time and money. As J. P. Morgan once observed, “I do not pay my lawyers to tell me what I cannot do, but to tell me how to do what I want to do.”

For more information on when borrowers should engage legal services, contact Katherine at 267-470-1187 or via email at ktohanczyn@starfieldsmith.com.