From: Tad Borek 
Newsgroups: misc.invest.financial-plan
Subject: Re: Newbie commercial loan post
Date: Wed, 18 Oct 2006 12:28:06 -0500
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SJ wrote:
> 2 partners and I have applied and been granted a SBA loan through a 
> local bank.  We then needed a larger amount and they asked for more 
> collateral.  One of my partners fathers put up a clear rental property 
> as that collateral, but is not one of the borrowers on the loan.  Our 
> loan officer proceeded to tell him that "we couldn't have got the loan 
> without him" and " your contribution is the most of any of the 3 
> partners".  I had explicitly informed the loan officer not to divulge 
> anything about the loan to him and he agreed that it was not his job to 
> do that....but he did, and now this gentleman who lent us the house is 
> demanding a cut of our profits for the life of the loan.  Is what the 
> loan officer did illegal or just unethical?  Does anyone have any 
> thoughts at all on the topic. thanks
> Scott

Scott,
I can't speak to the legalities, I'm not clear on exactly how the 
father's collateral backs the SBA loan (it seems he must be a party to 
the loan, signing something...and perhaps, to use some legalese, taking 
on joint & several liability for the nonrecourse debt?). But here are my 
thoughts...speaking from experience with a similar biz-startup situation...

1. Forget about the fact that the loan officer spilled the beans -- 
maybe it shouldn't have happened exactly that way but he should have 
spilled the beans, IMO. If the father's collateral is what made the loan 
happen, the father deserves to know that -- it means the other partners 
lack adequate assets to make good on this loan, meaning there's a 
bullseye on the house if things head south.

2. Not only that, he deserves to have an inside view of your business 
for as long as that lien exists, so he knows when and whether to take 
action to secure his property. The reality is that you will have, say, 
$50,000 in borrowed funds, or whatever the amount is, in your business 
checking account. That balance might rise steadily or it might all be 
gone in six months, spent on marketing expenses (which unlike say 
computer servers have zero "salvage value" in an asset sale). What 
happens then when you fold the business? Apparently you don't have the 
assets to back that loan, neither does your other partner. If the 
business goes bankrupt, you go your separate ways, and the partner's 
father is out a house...because the father has the only asset worth 
going after. Point being..if I were him I'd be demanding monthly 
financial statements and would take whatever action was necessary to 
nail down the cash if there was a sign of trouble. Yes, even if my 
daughter was one of the partners. It's a business transaction, business 
rules apply.

3. Please take my word on this part. Before you spend a dime of the loan 
proceeds, you all need to sit down and work this out through a 
partnership agreement of some kind. Get a lawyer to facilitate it and 
work through all the "what if?" questions...what if a partner leaves, 
what if he needs to sell the house, what if the daughter dies in a car 
wreck. Do not spend one minute on the business until you sort this out 
because once things get going it'll drop to the bottom of the to-do 
list. If you can't work it out, give back the money until you figure out 
another way to secure the loan. If you can't, forget about it...move on. 
This is the part where I'm speaking from experience. It's easy to put 
off these kinds of discussions forever, and you'll eventually need to 
address them when either a) the business folds and there's a risk of 
foreclosure or b) the business succeeds and the father/daughter revisit 
the question (in court) of how much their share should be. Either way, 
your bargaining position, all around, is much better now, before the 
fact, and you're much more likely to come up with fair solution.

-Tad