Best Practices: When to require a Borrower Opinion of Counsel in a 7a loan

Legal opinion letters are an integral part of business and commercial transactions and financing. In fact, on large dollar 7(a) loans or complex change of ownership transactions, Lenders often require Borrower Opinion of Counsel letters.  When written by experienced attorneys, these letters help alleviate Lender concerns about the Borrowers’ and Guarantors’ legal status, smooth the way to help ensure loan eligibility, and thereby provide comfort to the Lender that compliance with SBA program requirements has been achieved.

The Borrower Opinion of Counsel on a 7(a) loan transaction will generally confirm the following items:

• Verify Borrower’s compliance with state law;
• Entities were validly formed, in accordance with state law;
• Entities and individuals, both borrowers and guarantors, have the authority to transact business in compliance with the requirements of the SBA 7a loan authorization;
• Execution and delivery of the loan documents will not cause the Borrower to be in violation of any other agreement to which the Borrower is a party, nor will it conflict with any order or governmental regulation affecting the subject property;
• Indicate that the loan documents, assuming they are properly executed, will be binding on the Borrower and the Lender.

While there is no specific legal requirement for an opinion letter on a 7(a) loan transaction, they typically provide an additional safeguard for the Lender. This is especially true when higher loan amounts are involved, when a Lender is lending outside of its typical “footprint,” or when the transaction spans multiple states, such as when a principal living in one state acquires the operations of a business in another.

Additionally, a Borrower Opinion of Counsel provides a measure of comfort to the Lender that, at the time of loan closing, there are no open issues relating to several matters.  These may include confirmation that the Borrower, if an entity, has obtained all necessary licenses and approvals; that the Borrower possesses the authority to enter into the loan transaction; and that, in the event of a loan default, the Borrower will not have a defense that the loan documents are unenforceable. The use of a Borrower’s Opinion of Counsel may also lead to a reduced likelihood of disputes post-closing as the parties will have been communicating during the processing of the loan and thereby eliminating future misunderstandings.

While obtaining a Borrower Opinion of Counsel from an experienced commercial attorney is often quite helpful, the use of such an opinion from an unsophisticated or inexperienced attorney will have its downsides for both the Lender and the Borrower.  A bad lawyer may cause the process to drag unnecessarily.  Especially on the smaller loans, it is often difficult for entrepreneurs to justify the charges or see the future benefits.  Accordingly, it is critical that the Lender explain the benefits of good legal representation to the Borrower.  Having knowledgeable, experienced counsel can often help the transaction proceed smoothly, and may help to guide the small business as it encounters challenges in the years to come.

In our experience, it is not surprising that the vast majority of small businesses that succeed are those with excellent legal representation.  Lenders will reap the benefits of educating Borrowers about the importance of retaining experienced commercial counsel, and may wish to consider setting those expectations at the outset of the loan process by requiring a Borrower Opinion of Counsel.

For more information, contact the attorneys at Starfield & Smith at 215-542-7070.