Clint M. Hanni
Getting a business loan can be a long and difficult process. The bank wants to see everything, the good and the bad. Here are some tips when working with a bank to get a commercial loan. It all starts with a good term sheet.
- Have your lawyer review the term sheet. It’s understandable that you want to keep costs down, but don’t skip a legal review of the term sheet or letter of intent. Have your lawyer review it before you sign it. Getting counsel involved to review a loan agreement after a term sheet has been signed makes it difficult to renegotiate problematic financial or non-financial terms. An experienced credit finance lawyer will quickly identify terms that may be out of market and help you get them back in line with what works for your business. It’s in your favor to work as much detail into the term sheet (even if it’s a non-enforceable letter of intent) as possible before loan documents are prepared. The term sheet will set the tone for the rest of the loan negotiation, and you need to get it right.
Focus on the reporting requirements. Borrowers understandably pay a lot of attention to the basic terms of a loan: interest rate, maturity date, financial covenants and events of default. But there are other important obligations in a loan agreement that are often glossed over by borrowers. For example, the borrower will typically be required to send the bank periodic reports on the borrower’s financial condition. Usually, this includes providing quarterly financials 30-45 days after the end of each quarter and its annual financials 60-90 days after the end of its fiscal year. Asset-based loans often require frequent reporting of outstanding accounts and inventory. Some lenders may ask for monthly (or even weekly) budget reports. The point is, the borrower will have to live with the reporting requirements. Be aware of what the bank wants and don’t be afraid to push back before you sign if the reporting requirements are too onerous. It’s critical to have an experienced credit finance lawyer on your side to let you know if the bank is asking for more than is customary.
Understand the collateral. If the loan will be secured, the term sheet should clearly describe the extent and types of collateral. For loans secured by personal property (as opposed to real estate loans), it may be as simple as “all assets” or it may be only accounts, inventory and equipment. Most banks will require borrowers to provide “first priority liens” on the collateral, so you need to know whether there are any outstanding liens on the collateral that won’t be paid off with the new loan. The bank will do its own Uniform Commercial Code (UCC) lien search to confirm this, but many headaches can be avoided by clarifying at the term sheet stage exactly what the bank will have as collateral.