From
The KDDK Advantage - March 2006
Advice on Borrowing
for Business
When individuals or business partners
go to the bank for a business loan, very often they don’t
think about engaging an attorney until after a commitment
letter has been signed. But it’s important to know that
a borrower can often achieve greater benefits and a better
result by bringing legal counsel into the process before
the loan commitment is finalized.
The best time to secure concessions for the borrower’s
benefit is before the loan commitment is signed. That’s
when borrowers have the most leverage in negotiating with
the lender. Once the loan commitment is signed, lenders
tend to become less flexible and less willing to deviate
from standard practices. Here are some of the factors
to be aware of when negotiating a business loan, line
of credit or other credit arrangement. It is strongly
recommended that borrowers seek legal counsel during this
process.
The Gray Areas
Because there are significant variables which may give
the lender the right to withdraw the loan commitment,
the commitment letter should make it clear under what
terms the lender is obligated to grant the loan. On the
same note, it’s important that the borrower understands
the language of the loan commitment in order to be clear
on whether it is in fact a firm agreement to lend, or
a document which still leaves open the possibility that
the loan will be denied.
It is also critical for the borrower
to disclose any financial, operational, or legal problems
before the lender issues a commitment because disclosing
problems later in the process could give the lender the
right to back out of the loan or alter its terms. Just
as importantly, the borrower’s failure to disclose any
problems early on may damage credibility and cause the
lender to lose trust in the borrower.
Fees, Renewals and Other Key
Concerns
In addition to the usual terms contained in a loan commitment
such as the amount of the loan and collateral and repayment
terms, there are several other conditions which the borrower
may be able to negotiate as part of the loan commitment.
Borrowers may benefit from an attorney’s guidance in identifying
issues which can successfully be addressed in the loan
commitment, such as:
-
Whether
the borrower has the right to renew the credit arrangement
or extend the terms of the loan, and whether this
right will be granted with or without renewal fees
-
Limits
on lender attorney fees incurred in the preparation
of the loan documents
-
The
scope of financial covenant
-
The
exact definition of key terms, such as “eligible inventory,”
which may be the basis for loan limitations
-
The
right to pay off the loan early without penalty
-
Terms
for limiting individual repayment obligations - when
more than one guarantor is involved - to the percentage
of debt that is equal to each guarantor’s percentage
of ownership in the business. This is preferred over
making each of the guarantors responsible for the
full amount of debt.
-
Expiration
of guaranty obligations after a certain period of
time, or expiration of the guaranty if the borrower
attains certain profit levels.
Business
attorney Jeff Helfrich’s practice areas include mergers
and acquisitions, commercial finance, real estate, business
organizations and health care law.
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