October 22, 2024
Adam Hoeksema
I had a client moving right along through the process with their SBA loan application when the bank dropped something unexpected on them: a good faith deposit. They gave me a call, a little nervous, asking, “Is this normal? Will I get my money back?” It’s a question that comes up all the time, and I completely understand why. Putting money down before the loan is even finalized can feel risky.
Having worked as an SBA lender for over 12 years, I’ve seen many borrowers hit this point in the loan process and feel unsure about the next steps. Now, through ProjectionHub, I help small businesses create financial projections that lenders need, and this gives me a unique understanding of what lenders are looking for. A good faith deposit can be a bit of a head-scratcher for first-time borrowers, but it’s a normal part of the process when your SBA loan is about to go into underwriting. Let’s break down why lenders ask for it, how it protects them, and what it means for you.
So, what exactly is a good faith deposit? For an SBA loan, it’s money you put down to show you’re serious about moving forward. It’s like a handshake with a little cash involved—letting the lender know you’re committed. It also keeps borrowers from shopping around at 10 different lenders at once and wasting time for the 9 lenders that don’t earn your business. If you have to pay a deposit at each lender, you will probably stick with 1 or 2 lenders at a time.
This isn’t just some extra fee; when a loan goes into underwriting, the bank starts incurring costs for things like appraisals and the staff time associated with underwriting, and the deposit helps cover those expenses.
So, you’ve decided to put down a good faith deposit. Here’s what you need to know. Usually, this payment signals that your loan is heading into underwriting, and it typically ranges from $2,500 to $10,000. The terms will be outlined in a letter of intent or commitment letter, which will spell out when you might—or might not—get that deposit back.
Will You Get Your Deposit Back?
The short answer: it depends. If the bank declines your loan, you’ll usually get a full refund. But if they’ve already spent money on things like appraisals or legal fees, they might deduct those costs. If you back out, there’s a good chance you’ll forfeit some or all of the deposit. That’s why understanding the fine print is critical—vague terms can cost you.
If the bank does all of the underwriting work and approves your loan and then you decide not to move forward with the loan, you probably aren’t going to get that deposit back.
Protecting Yourself
Before handing over the deposit, make sure you’re clear on the refund conditions. Don’t be shy about asking questions or negotiating terms. And document everything—emails, verbal agreements, the works. If there’s ever a dispute, having a record can save you a lot of headaches.
When it comes to a good faith deposit, the commitment letter or letter of intent is your go-to document. This is where the bank outlines all the terms regarding the deposit. Think of this document as the playbook for what happens next.
Key Clauses to Watch Out For
Pay attention to clauses that mention “non-refundable expenses.” If the bank lists specific fees that won’t be refunded (like appraisal or legal costs), make sure you understand what they are and how much they might be. Sometimes, the language used can be vague, which can leave room for interpretation—so don’t hesitate to ask for clarification.
Negotiating Terms
Believe it or not, the terms in the commitment letter aren’t always set in stone. If the deposit amount is higher than expected, or if certain refund conditions seem too restrictive, you can try to negotiate. While banks may not budge on everything, it doesn’t hurt to ask for adjustments that protect your interests.
Red Flags
Be cautious if the commitment letter lacks details about refund policies or uses overly broad terms like “discretionary fees.” The more precise the language, the better. If anything feels off, it’s worth getting a second opinion from a financial advisor or attorney.
Before paying a good faith deposit, make sure you’re genuinely ready to commit to the lender, as withdrawing later could mean forfeiting your money. If you have a strong financial background or pre-approval, use that to your advantage and try negotiating more favorable deposit terms.
At the end of the day, a good faith deposit is more than just a financial transaction; it’s a step toward making your business vision a reality. It shows that you're ready to invest in your future and build a relationship with a lender who believes in your plans. Think of it as one of the many commitments you’ll make on your entrepreneurial journey. The road to securing an SBA loan may come with some hurdles, but each step brings you closer to achieving your goals. If you have any questions, please reach out to us at support@projectionhub.com.
