Getting a commercial mortgage loan in Maryland can seem like a giant nightmare, especially for small business owners who are just setting foot in the commercial real estate market for the first time. One of the biggest causes for stress is simply the fact that for many people, a commercial mortgage is the single largest loan they will ever take out in their lives. More than that, however, the process of obtaining a commercial real estate loan can be convoluted, long, and very involved.
Local Banks v. National Banks
One way to make the process much easier is to get your loan from local banks v. national banks or regional chains. There are many advantages for choosing to pursue a commercial mortgage loan from a Maryland community bank instead of a larger bank. All of them can make the process significantly easier to navigate, and end up saving you time and money.
Better Access to Decision Makers
When you apply for a commercial real estate loan from a large bank, the person you will be dealing with on a daily basis is rarely the same as the person who ends up approving or denying your loan.
In fact, it’s highly unlikely that the person you interact with ever talks to, or even knows, the final decision makers. With a local bank, your lending representative might not be the final decision maker either, but they are certainly much closer to the top of the decision pyramid.
Because community banks are smaller than large chains, the lending process tends to be more inclusive, and your lending representative will have plenty of opportunities to bend the ear of the final decision makers to support your loan.
Understanding of Maryland Commercial Mortgage Loans
Lending managers at larger banks base much of their decisions and processes on the directives that get passed down from the top. This formulaic approach to issuing commercial mortgage loans give them less of an insight into what is actually happening in their back yards. They also tend to move from branch to branch far more often, and aren’t as plugged in to the local market the way that community banks in Maryland are.
A lending manager at a local community bank, on the other hand, will usually be much more plugged in to the real estate market in your area. With the experience that comes with doing mainly small business commercial mortgages, your community bank lending manager will be able to advise you on what similar deals have passed through their office have closed for, what kind of prices other buildings are going for, and whether now is really a good time to buy or not.
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These kinds of insights are only possible when lending managers spend the majority of their time talking to small business owners and focusing on small business commercial mortgages.
More Investment In Your Success
Large banks rely on high churn to constantly keep profits high. That is, they are far more interested in doing a large number of deals with a large number of customers than they are in helping their customers get larger and larger deals. Community banks often don’t have the luxury of a customer pool numbering in the millions. Instead, the focus of your lending manager is customer retention and growth.
Rather than seeing you as just another number in the line of mortgages they will issue, your business is central to the bank’s financial success, and your growth is essential to future success. To that end, your lending representative is more likely to go out of their way to help you succeed, in the hopes that when it comes time for you to expand to a larger building or a new location, you will come back to give them your business. The better they can make your financial situation, the sooner you can be their customer again.
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Finding business equipment financing, or business funding for any expansion, can be a difficult and time consuming process. One of the best pieces of advice anyone can offer a small business owner regarding the process is: start early, and put in the hours. Many entrepreneurs, though, don’t realize exactly what’s meant by putting in the hours. The process of getting business equipment financing can be so convoluted and involved that many business owners just don’t know where to start. To help ease the stress and simplify the process, we’ve put together a step-by-step guide on financing an equipment purchase for your small business.
Include Business Equipment in Updated Business Plan
Before you even consider approaching any banks or speaking with any lenders about a business equipment loan, you need to have all your pre-work finished. What do we mean by pre-work? At the absolute minimum, you should have financial statements prepared and checked, going back as far as you can. You should also have an up-to-date business plan. Don’t think that you can simply reuse the business plan that you drew up when starting the companyâ€”unless you just started your small business a month ago, chances are that something has changed since then, and these changes need to be accounted for.
Make sure that the equipment you plan on purchasing is listed in the updated business plan, and that you have very clearly and explicitly accounted for what specific equipment you want to purchase, where you want to purchase it from, how you plan to pay for it, and what kind of impact the new equipment will have on your business. That last part is going to be very important, and you will need to make a clear and fact-supported case for how the equipment will help you grow your business. Make sure to justify the expense, and build a strong case for getting new business out of the investment.
Applying for Business Equipment Financing
Remember, business equipment financing should be a mutually beneficial relationship between you and your bank. Make a list of multiple banks that you would like to approach, and set up a meeting to talk to their small business lending representative or bank manager. Be sure to inquire about their equipment financing terms before moving much further.Â If their financing agreement is not something you are willing to take part in; you can quickly disqualify this bank.
Treat it like you would an interview with any potential partner: find out what they would like out of the deal, ask if they have any experience financing equipment or companies like yours, and get a feel for how the loan application process is set up.
Once you are comfortable with the banks you’ve spoken to, it’s time to start applying for financing. To make the process easier, take all of the documents you’ve compiled and make copies of all of them, and put them in a folder labeled with the name of the bank it’s going to. Make sure you include your financial information, business plan, and all identifying business documents (articles of incorporation, business licenses, etc.) You’ll also want to make sure you have your own ID handy.
Initially, if you have all of your documents in order, the bank will review them and let you know about next steps. It’s quite likely that they will contact you with additional questions, or request other documents. Sometimes, they might do both when you first come in to apply. Don’t be dismayed, and instead take note of the questions you are being asked, and the additional documents. Get copies of the documents prepared to have ready in case the other banks you approach also request them, and look for feedback on your answers so you can know how best to phrase them the next time they come up.
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Getting An Answer
Once all the questions have been answered and the bank has all the documents they need, all you can do is wait. How long it takes depends on the bank and how quickly you responded to requests for additional documents. It can take days, or a week, or in some cases a month if there is a lot of back and forth and further requests. This is why small businesses should do everything in their power to anticipate financing needs well in advanceâ€”it’s better to be approved for a loan too early than to miss an opportunity because of a long approval process.
If your equipment financing is approved, congratulations!
If not, don’t be discouraged. We have heard stories of small business owners approaching 20 or more banks before finding one that will approve them. Take the answer well, and see if you can get clarification from the bank manager or small business lending representative about why your equipment financing request was denied.Â The most common reasons for denial are bad credit, not enough monetary value in collateral, under-capitalization, issues with cash flow, and outside conditions.
If you handle the rejection with professionalism, many lenders will be very candid and up front, often even going so far as to offer advice on how to get your financing approved elsewhere. Take this advice, and use it to make your next loan application even better.
Equipment purchases are a vital part of starting a small business in Maryland, especially for manufacturing and retail companies. They can also be necessary investments once your business is up and running. Equipment updates and modernizing old equipment can make your business more productive, efficient, and even save you money in the long haul.
Equipment, however, is a significant investment and very few small businesses have the cash on hand needed to outright purchase large scale equipment. With costs that can easily run into the hundreds of thousands of dollars, finding a way to finance equipment purchases is something that many small business owners have to look into to grow their company. While there are many ways to finance business costs, many business owners turn to something called an equipment term loan for acquiring or updating new machinery and equipment.
What Is an Equipment Term Loan?
An equipment term loan is essentially a business loan that offers either a fixed or floating interest for a pre-specified term (seven years on average). If the loan is longer than a few years, a fixed interest rate is what generally draws business owners to an equipment term loan, since the stability of having a locked-in interest rate is often times a safer bet than financing with a floating interest rate loan or a credit card. Those types of financing could have an unexpected increase in the APR, potentially adding thousands of dollars in additional interest.
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Getting Started with Equipment Term Loans – Things to Consider
- You might need additional collateral for your loan. Depending on the amount of money you’ll need to finance, standard collateral for a personal loan (like a vehicle) might not be sufficient enough for an equipment term loan. Be prepared to find other types of collateral that will be accepted by your bank. Real estate is the most common type of collateral for a long-term business loan, given that it’s one of the most common types of assets that are available to business owners. Other types of collateral that are commonly accepted for equipment term loans are natural reserves, inventory, plants, and machinery.
- Though the average term loan for business equipment is around seven years, some term loans can extend as long as twenty years. This largely depends on the cost of the equipment being purchased, as financing for a larger sum of money generally takes a longer term to pay off. Depending on your company’s financial situation, and how much money you can afford to pay back each month, you can work with your bank to find a term that works well for you. Longer terms will rack up more interest, resulting in a larger overall payment, but will have smaller and more manageable monthly or quarterly payments. Shorter term loans will keep your overall repayment costs lower, but you’ll have to take on larger monthly or quarterly payments.
- It could take two to three months to get approved. The process for securing an equipment term loan isn’t an altogether quick and easy process. Keep in mind that in best case scenarios, a few weeks is needed to process an equipment term loan. In a worst case scenario, it could take anywhere from a month to 2-3 months to review your company’s financial statements and finalize the paperwork before any money makes its way into your account.
- You’ll need to prove your credit worthiness. Business term loans, especially ones for high ticket purchases like manufacturing equipment, have a very thorough loan approval process. Be prepared to not only have your personal and business credit reviewed, but also your company’s financial statements, including cash flow, revenue projections, and possibly even your personal financial statements. The bank will want to make sure that you’re in a good financial position to be able to take on monthly or quarterly equipment term payments for the duration of your loan term.
Whether you’re looking to acquire vehicles for your company or balancing the pros and cons of owning equipment versus leasing it, figuring out what option will work best for your business is an important decision to make.
There are a lot of factors that play into whether leasing or financing makes more sense for your business. These range from the type of asset that you’re looking to acquire (vehicles, machinery, equipment, or technology) to how long you plan to use it and how often you’ll need to upgrade. But before delving into the specific needs your company has, it’s important to understand the basics of financing versus leasing.
Leasing for Business
Benefits of Leasing
Leasing is a contractual arrangement between the owner of an asset and a person who is willing to pay to use that asset. Leasing has obvious benefits for business owners, one of which is the ability to get approval for a lease much quicker than you would if you were financing. Approval for leasing vehicles or equipment can usually come as quickly as 1â€“2 days. Leasing also offers a lower fixed interest rate, though many people don’t realize that leases come with interest rates (also sometimes called “lease rates”).
Drawbacks of Leasing
One of the downsides to leasing, however, is that you don’t get to reap the benefits of ownership. If you plan to keep machinery or equipment for a long period of time, financing to buy it outright may be a better plan. But, if you will need to upgrade machinery or equipment often, leasing can provide the flexibility of being able to upgrade without having to sell off older assets. This, in turn, can help your business stay current with technology advances without having to take on the expense of a mass upgrade on technology or business equipment.
Financing for Business
Benefits of Financing
Financing to purchase equipment or other business assets has it’s advantages too. For one, you have the benefit of ownership after paying off the loan. That also means that those supplies or machinery will add to your company’s list of assets, increasing the overall value of your business. As an added benefit, owning business assets can help you secure more substantial financing in the future which can help you grow or expand your business. It can also make your company more attractive to potential buyers or investors since tangible assets are easy to apply value to and can be sold off in the event that you need to raise money.
Another major benefit that you can reap when financing to buy is that the interest on money leaseed for business expenses is tax deductible, which can potentially save you thousands of dollars on your tax bill at the end of the year.
Drawbacks of Financing
Financing isn’t always ideal, though. If time is of the essence, and you need to obtain assets quickly, a loan may not be the best option, as it can take a much longer period to get approved. Even smaller business loans will have a more stringent approval process in place than just a leasing agreement. Gathering and reviewing financial statements, running credit checks, and finding collateral for your loan (if necessary) can seriously lengthen the amount of time it takes between applying for financing and getting money into your account.
Regardless of if you choose to lease or to lease, make sure to weigh the pros and cons of each with your banker or a financial consultant. Each business is different, and some options will make more sense than others for your company’s specific needs.
With the U.S. economy on the road to recovery and banks feeling more comfortable with lending, commercial real estate lending is expected to pick up significantly over the coming year nationwide as well as here in Maryland. If you’re in the market for commercial real estate or want to increase your company’s assets, purchasing your company’s operating space or expanding operations to other locations is a good move.
However, buying commercial property is a big step and one that requires a lot of thought and planning. In the right circumstances, it can be a hugely beneficial move, creating more value for your business and also allowing you to potentially add new revenue streams to your bottom line. But before you jump in, there are three things you should know about commercial real estate lending in Maryland.
Business and Personal Credit
Business credit is a common tool for helping banks figure out how creditworthy your company is, and what the likelihood is of you being able to pay back a commercial real estate loan. Building business credit takes time and is not unlike building a strong personal credit history.
Making vendor payments on time is a great way to start building business credit, as is opening up a business credit card that you pay off each month. Keep in mind, though, if your business doesn’t have sufficient credit, the bank will need to pull your personal credit history to approve you for a loan. And, just like with personal loans, a better credit history will get you much more favorable loan terms and lower interest rates.
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Understand the Appraisal Process
An appraisal of the commercial space intended to be purchased will have to be completed before a commercial real estate mortgage can be approved. The purpose of an appraisal is to figure out how much money the bank will need to lend to the business owner, as well as what the actual value of the property is, since it acts as the collateral for the loan. Additionally, an appraisal will help make sure you’re paying a fair price for the commercial real estate you’re interested in buying, based on similar properties and other available housing and neighborhood data.
The appraisal process for commercial real estate is quite different from the appraisal process for residential real estate. Commercial real estate appraisals are undertaken by the lender and a full appraisal can take anywhere from a few days to a few weeks. While a lot of different factors play into an appraisal, there are a few that are standard to any appraisal.
First, an appraiser will conduct an inspection of the space. This is to check the size and the condition of the building. Additionally, an appraiser will research the neighborhood the space is in, as well as similar buildings in the area, and draw upon publicly available data to get a well-rounded and unbiased value for the property.
Be Patient Throughout the Approval Process
Getting a commercial real estate loan is a time-consuming process. From gathering all of the right financial documentation and finding the perfect commercial space to going through the appraisal process and getting a decision from the lender, the entire process can take up to 4 months. Sit down with your lender and discuss what steps you’ll need to take to get the ball rolling and make sure to have all of your financial information organized and ready. This will help make the process as smooth as possible and help move things along towards closing on your commercial real estate loan.
Most small business owners know that at some point they will likely need some form of small business financing to grow and expand their business in Maryland or anywhere. Many of these entrepreneurs, however, donâ€™t have a great understanding of the different factors that banks take into account to determine the terms of small business financing.
Not understanding the factors that go into the final lending decision puts small business owners at a disadvantage: without knowing what they need improvement on, it’s harder for business owners to take steps to get better terms. This, in turn, increases the cost of borrowing and decreases the speed at which companies can grow.
The good news for entrepreneurs seeking a loan is that the factors that influence terms and interest rates for small business financing are very similar to the factors that influence personal lending terms and interest rates.
In other words, if you can figure out how to make your personal loan terms better, you can do the same for your business.
The most important factor, of course, is your personal credit score. If you run a partnership or corporation, all founders or major stakeholders may need to have their credit score checked. After that, though, there are three main factors that banks use to determine your creditworthiness.
#1: Payment History
Do you pay your bills on time? Are your vendors or previous lenders satisfied with how promptly you pay back your obligations? Are you in default on any loans? These are some of the questions that banks ask when looking over your previous payment history.
A strong history of making all payments on time and not borrowing more than you can afford to repay makes lending institutions feel more comfortable financing your small business.
How do you build up a strong payment history? A common myth states that the best way to make banks want to loan you money is to make sure that while you repay on time, you always leave a small balance on your account that generates interest. This, we’re confident saying, is probably a terrible decision. Instead, simply make sure that you always pay off balances on time. If you can pay them off early, do so. Banks, especially these days, are looking for safe investments. If they know they can loan you money and have it back when your term expires or earlier, you look like a much safer investment.
Another idea is to pay vendors on account, especially vendors that report accounts payable to an organization like Dunn & Bradstreet. This helps you build up credit easier without having to go through the process of applying for a loan, which can be difficult if you have no previous borrowing history.
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#2: Cash Flow
Do you spend more than you make? Are you reporting a profit regularly? Can you afford payments on the loan after paying operating expenses? These questions help banks understand whether your cash flow, both past and future, can comfortably sustain repayment on your small business financing.
Banks will want to look over your past accounting to make sure that you are spending money responsibly and that you have high enough margins to cover the loan, as well as possible unforeseen expenses. They will also want to take a look at your projections and compare them to your past spending to see if you will continue to operate at a profit over the term of the loan.
The best way to pass this requirement with flying colors is to spend less than you take in, and keep good records. It also helps to use a reporting service that can keep track of your historical profits and losses. Having a verifiable way to show positive cash flow can be a good way to make sure you get the best rates on your small business financing.
Always Keep Up to Date Records
#3: Business Plan and Company Structure
How are you going to use the money you get? Who controls the bankâ€™s money? What kind of projected return do you see on the loan? These questions help banks get a feel for whether you have thought your loan all the way through, as well as being able to gauge whether you will be able to pay it all off by the end of the term.
Make sure that your business plan is rigorously researched and supported by evidence. If you have projections for how the financing will make money for your company, be ready to support those projections with hard evidence. It also helps to have a loan point person, especially in corporations with multiple co-owners or partnerships. This gives the bank assurance that the money will be spent the way you say it will be, and that one single person will be responsible for preventing mismanagement of funds.
Is a Small Business Term Loan Right for Your Company?
Looking for capital to make a large business purchase or provide working capital for your company can be a long, arduous process, with many small business owners not fully understanding the process. With so many options to consider, it can be difficult to focus in on one to determine if it might be right for your business. The fact that banking jargon can vary so much between commercial lending and consumer lending doesn’t help things one bit. Many first-time business owners looking for a point of reference in their own personal banking are often just as lost as people who have never taken out a loan in their lives.
Few things are as exemplary of this confusion as the small business term loan. While easily being among the most common loans available to businesses, many business owners don’t actually know what a small business term loan is or what it means for their company.
What Is a Small Business Term Loan?
Put simply, a small business term loan is just a standard business loan offered by a commercial bank to a business. Most often, these loans go towards large capital improvements or capital purchases. Term loans are frequently used to purchase new equipment, renovate or expand facilities, or upgrade equipment. Less often, business term loans are used to purchase other businesses or to provide working capital.
Small business term loans often come primarily in two varieties: intermediate-term loans and long-term loans. Intermediate-term loans typically last no more than five years. They are often smaller, and more likely to be used for working capital or equipment purchases. Intermediate-term loans are usually paid monthly and are fully amortizing. Intermediate-term loans usually require collateral.
Long-term loans, on the other hand, are given out for durations of up to twenty years, or more in very special circumstances. These loans tend to be for significantly higher amounts than intermediate-term loans. They are often used to fund large-scale capital purchases or expansion, such as opening up a new plant or location, or building a new company headquarters. Long-term loans will definitely require collateral, and often include other specialized requirements such as limits on how much total debt from all sources a company can take on.
Term Loans are A great Way to Finance Your Business
Whatever small business term loan you are looking for, keep in mind that while term loans are a great way to finance your business, they always come with a very thorough approval process. You will need to open your books to the bank and show that your business is profitable enough to support the added risk. You will also need to put up some form of collateral, and will likely need to demonstrate that you have enough cash flow to repay the loan. Having a strong business plan and a historical set of projections that you have either met or exceeded will go a long way towards securing your small business term loan.
Knowing that, why are term loans considered to be a great deal? Unlike many other types of business loans, the interest rate is many times fixed and remains steady throughout the term. This gives business owners security and predictability, knowing that their loan amount will remain constant. They can be cheaper overall than other types of loans. When spending tens or hundreds of thousands on capital improvements, even a percentage point or two difference can mean huge savings. That means a much higher return out of large-scale improvements; something every business owner loves.
Many first-time small business owners see their relationship with their business bank as being entirely one way. They deposit money, they take out money, they write checks – all the interactions focus solely on what people think of as traditional banking services. This isn’t surprising, given that large national and regional banking chains work very hard to cultivate just this type of a relationship with their customers. It often comes as a surprise to many business owners that their bank can be a huge asset in terms of small business development.
Your banker can be a huge source of value when it comes to small business development. Above and beyond simply helping you with your business needs, most bankers that deal primarily with small businesses can offer advice, guidance, and valuable insight that is hard to come by anywhere else. These additional services aren’t on the bank’s website, and you won’t find them in any brochure in the lobby. Nevertheless, they can be among some of the most powerful and important services your bank provides.
Business Plan Assistance
Chances are your banker has seen a lot of business plans over the years. Often, they’ve also seen which ones are successful, and which ones are most likely to fail. This kind of business plan assistance can be incredibly helpful to formulating a business plan and working out the kinks. Because many small business bankers review business plans for loans, and then have the loan repayment information to confirm whether the business succeeded or failed, they can be invaluable in looking for flaws or holes in your business plan, and can help you shore up possible weaknesses.
Writing a small business plan is very difficult and time consuming, and many small business owners simply don’t know where to start or what needs to be put in them. While professional services exist solely for helping with business plans, these services often carry a significant cost, and rarely have the same ability to track success and failure as your banker. So whether you’re writing out your business plan for the first time, or sprucing it up and updating it in preparation for seeking financing, consider running it by your business banker and get some valuable business plan assistance.
Assistance Finding Help
You have a business, you’ve been generating record sales month after month, and now it’s tax time and you need an accountant or bookkeeper. Or maybe you’re looking to close a big deal and need an attorney to help you review the contract. Or maybe your office network has gone down and you need someone to come in and get things back online ASAP. Small businesses often run on the strength of their support services. Finding these support services can be difficult, though. Without referrals from a trusted source, it’s easy to get confused and overwhelmed by the myriad of professionals all fighting over your business.Â Predicaments like these can be a roadblock to your small business development, if you are not able to efficiently remedy such issues.
This is another area where your small business banker can point you in the right direction in terms of small business development. Especially at a local community bank, your banker is likely very plugged in to the professional services community. Bankers often have the advantage of being able to interact with a huge variety of professionals, and often have a good idea of who is working with whom and how that relationship is going. In fact, asking your banker for a recommendation is often better than going out and asking other business owners. Why? Because bankers have a wide variety of clients, and talk to people in all sorts of industries and professions, letting them get a broader picture of the people they recommend.
Want to get an idea about how the retail sector is doing in your community? You can go out and do your own research, hire a professional firm to conduct some surveys, or ask your banker. Bankers, simply by nature of their job, often have their fingers right on the pulse of their communities. While they would never disclose any confidential or proprietary information, watching accounts open and close and loans come and go gives them some pretty good insight into the state of the local economy. Talking to your business banker is a great way to prepare for expansion or contractions, identify new market segments, or determine if your business will be financially viable in a new area.
Shopping for a small business bank can be a confusing experience. First-time business owners, especially, can have difficulty anticipating the small business banking services their business will need. We often have new small business owners coming in without a strong understanding of what services they need their community bank to provide, and what small business banking services they’re likely to need as they grow.
The problem is that the services that a small business needs aren’t the same services that many consumers use. So while someone shopping for a consumer bank might be swayed by how close a bank is to their home, or how convenient their hours, they probably aren’t thinking about what kind of payroll or ACH services the bank offers.
To help our small business customers, we’ve put together a list of five small business banking services you should always look for when choosing a small business bank.
Automated Clearing House
ACH, or Automated Clearing House, is the vast electronic network overseen by the National Automated Clearing House Association and the Federal Reserve that allows banks to quickly and easily send money directly between accounts. So in movies, when the wealthy protagonist says “I’ll have my banker send you the money,” he really means that the bank will use ACH to transfer money from his account to the account of the man he just bought an island from. In more mundane transactions, ACH is used for everything from automating bill-pay to depositing money directly into employee accounts for direct deposit payroll. All banks have access to the ACH system, however not all banks make it easy or affordable to use. Check to make sure your small business bank offers this small business banking service and doesn’t charge hefty fees for its use.
Payroll can be one of the most confusing aspects of running a small business. Between the various taxes and fees you have to keep track of, the reporting requirements, and actually making sure that paychecks get printed on time and sent out, the whole process can be a giant hassle. Many banks specializing in small business banking services can make the process easier by providing payroll services, through a third party. These services include calculating and setting aside all the proper taxes, keeping track of employee information, printing and sending out checks, and reporting. Not all banks offer payroll services, however, and you should check with your bank before using them for your small business.
Most banks now offer online banking for consumer accounts. Not all banks, however, offer online banking for business customers, and that can cost you time and money. Check with your bank to make sure that their business accounts are accessible online, and that you can perform common functions like checking your balance, transferring money, paying bills, and depositing checks from your computer. The time you save by being able to bank online will be well worth the more thorough investigation.
Accounting Software Integration
Whether you use Quickbooks(link to article about benefits of quickbooks) or another accounting software product, make sure that your business bank supports accounting software integration. Being able to pull in banking information to reconcile inside the software can be a powerful way to monitor the health of your growing business and make plans for the future. Not being able to integrate the software directly with the bank, however, means that information has to be input manually. This costs you time, and can lead to human errors that throw off all of your careful calculations.
Escrow services is a term that many small business owners have heard, but many might not know exactly what it is, how it works, and how it can benefit them. While there are some industries that use escrow services more than others, there are a few distinct situations in which every business owner will likely need to use an escrow account. To help clarify how escrow accounts can be used and how they can benefit business transactions, we’ve rounded up some information for small business owners.
What are Escrow Services?
An escrow is a deposit of funds for goods or services that are to be delivered to a specified recipient upon completion of an agreed upon condition or event. The funds are held by a third party and are only released when both parties of an agreement have fulfilled their duties. This ensures that everyone involved in the business transaction gets what they were promised.
Why are Escrow Services Useful?
Escrow services are designed to keep both parties in a transaction safe. They make sure that funds only go through after both parties have met their agreed upon obligations and are satisfied with the business transaction. It may seem like overkill, but it’s very useful for business deals that have a lot of complicated steps, such as buying property, acquiring a company, or any other type of large transaction.
How do Escrow Services Work?
The buyer and the seller (also known as the principals to the escrow) will draw up escrow instructions. This is a list of items that need to be completed before the transfer of funds is complete. This information is delivered to the escrow officer, usually the loan officer at the bank where the title of the property to be transacted is held. Once this step is finalized, the transaction process can take place. It’s always the escrow officer’s responsibility to make sure that all of the instructions in the escrow agreement are met and properly executed before the transaction is finalized.
After both parties have met their escrow obligations, the funds and/or property deeds or documentation will be transferred to the appropriate party and the escrow will be closed.
When do Small Businesses Need Escrow Services?
Escrow services are generally needed whenever there is a large sum of money being transferred from one person to another, or from one business to another. Escrow services can be used for all types of transactions, but there are a few distinct transactions that almost always go through escrow.
Mortgages: For both personal and commercial mortgages, down payments and closing fees will go through an escrow service. Since buying or selling real estate is a complex process that involves many different steps, and a hefty investment in both time and money, it’s a smart way to make sure that everyone involved is on the same page and feels secure about the transaction.
Property transactions: Purchasing a vehicle or other type of large property asset (machinery, equipment, etc.) – especially from an individualâ€”should be transacted through an escrow service. Any large scale purchase that requires a large cash outlay and a transfer of ownership will have a longer processing time, so it’s important to have any cash deposits for that transaction in a secure place while the details are being finalized.
Online property transactions and transfers: Even smaller transactions, like transferring a web domain or buying a web property may need to go through an escrow service. If you’re doing business with a person that you’ve never met before, it’s always better to exercise caution and execute transactions through a neutral third party.