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Asset Based Loan

Why are landlord waivers required for Business Loans?

Landlord Waiver

 

What is a landlord waiver and why are they sometimes required for business loans?

In many cases the need for a landlord waiver is questioned by the borrower.   Why do lenders require these for many popular small business loans such as a loan using bank statements? The lender has made an asset based loan or loan against equipment, such as vending machines or restaurant equipment.

 

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Lenders require landlord waivers to avoid or minimize losses for businesses with bad credit or slow pay as well as default on previous loans.   Many business loans include collateral that is on the premises of the borrower.   The landlord waiver allows the lender to enter the property and obtain the collateral in the event of a default.   If the lender did not have a signed landlord waiver, they could not enter the place of business of the borrower to take their collateral.   Landlord contact information will be ask for if this is required.

Without the landlord waiver

The lender cannot legally enter and repossess collateral.  The owner of the property can seek recourse against any lender entering the premises without permission of the landlord.  There are some business loans in which a lender asks for a landlord waiver but does not consider it critical for the loan.    This requirement is one of the top customer complaints with business loans.

A lender normally considers a landlord waiver absolutely critical if they ask for it and will not fund a transaction without the waiver.     Lenders worry that a landlord will refuse to allow them on the business property.   If this happens, the lender may not be able to recover their collateral if there is a default.

Why do I need to get a Landlord waiver?

Example: In the vending industry

Lenders that finance multiple vending machines will not fund transactions without all of the required landlord waivers.   Lenders that finance vending machines know that if they finance 10 vending machines, those 10 machines may be in 10 different locations throughout a metropolitan area.   If the borrower defaults, the lender would have to go to 10 locations to pick up the collateral.   They also cannot simply show up at a place of business to pick up collateral.   They must also have to have permission from the owner of the property because they will be uninstalling equipment, which is considered making a change to a property.   The lessee agrees in the lease not to make a change in the property without the permission of the landlord, so the lessee must contact the landlord.

What is a landlord waiver? Are landlord waivers required for a business loan?


In the event of a default on this asset based loan lenders do not want to contact 10 different landlords.    Each landlord would have to agree to an on site repossession.    The landlords know if they agree, those business that leases space from them may go out of business.

The landlord does not want the lessee to go out of business.    The landlord may want to deny the request.

These are the reasons why lenders will ask for this when a business loan is first closed.

The SBA also offers info on small business and negotiating with landlords.

Categories
Asset Based Loan

Should Accountants be required to be certified financial planners?

Accountants often fall into the activity of giving business owners advice on how to report their financial statements.   In many instances,  Accountants automatically will try to report the financial statements for their clients with as little net income as possible.    However, is there a case to be made that Accountants be required to be certified financial planners?

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There are reasons Accountants should have knowledge of both financial planning and business credit to assist them in their conversations with clients.    Accountants may automatically take as many deductions for their clients as possible and show the clients net income as low as possible, sometimes close to $0.   This may happen without having conversations with their clients about whether this is in the best interest of the client in the short and medium term.

Accountants and many of their business clients may think the Accountant is doing the best job possible if the Accountant shows the net income of the business as close to $0 as possible.  This type of reporting may occur for several years without any substantive conversation between the Accountant and the business owner.

In many cases, the Accountant is not considering whether their business clients will have financing needs in the following two to three years.   If the business will have financing needs, it is important for the Accountant to be aware of this and discuss with the owner of the business the importance in the credit review process of showing a healthy net income.   In many cases, the business owner will not be aware themselves of this issue, especially the owners of newer businesses.

Financial statements can be reported differently by Accountants in many cases by reporting officer’s salaries, amortization and depreciation differently.   There are also other items that can be carried over into future reporting years.  Different figures will result in a different net income reporting.  Accountants should have a strong or almost expert knowledge of the credit issues already, since they likely will have done the financials of many businesses.    The onus should really be on the Accountant to advise, or at least make their business clients aware of the significant drawbacks credit wise, if the reported figures for net income is too low.