Negotiating loan documents with your commercial lender often requires a delicate balance between meeting the lender’s requirements and your needs. The lender will typically want to protect all the rights and remedies that may be available to mitigate the risk of loan default, while you'll probably want to minimize the level of control the lender exercises and achieve a return on your assets that greatly exceeds your debt-service payments.
Here are key financial terms and issues you'll probably have to address to help you achieve that balance.
These will generally be calculated in accordance with prevailing market rates, the degree of risk inherent in the proposed transaction, the extent of any preexisting relationship with the lender and the cost of administering the loan.
You may have to secure the loan by pledging assets that have a value equal to or greater than the proceeds of the loan. Under such circumstances, try to keep certain assets of the business outside the pledge agreement so they're available to serve as security in the event that you need more money later. Beyond the traditional forms of tangible assets that may be offered to the lender, also consider intangibles (such as assignment of lease rights, key-man insurance or intellectual property) as candidates for collateral. Naturally, these assets may be very costly to a firm in the event of default. Consider pledging them only when you’re easily able to repay the loan.
Beyond the traditional forms of tangible assets that may be offered to the lender, also consider intangibles (such as assignment of lease rights, key-man insurance or intellectual property) as candidates for collateral.
These provisions are designed to protect the lender’s interests, and the typical loan agreement will contain several kinds.
Affirmative covenants encompass your obligations (and your subsidiaries, except as otherwise provided) during the period that the loan is outstanding.
Negative covenants (generally negotiable) encompass certain actions for which you must obtain the lender’s consent, and depend in large part on your company’s financial strength and economic and operational requirements.
Covenants may be serious impediments to your company’s ability to grow and prosper over the long run. Review all types of operating covenants carefully for consistency in relation to other corporate documents, such as your bylaws and shareholders agreements and for alignment with your business plans.
Regardless of the actual term of the loan, consider negotiating for the right to prepay the principal of the loan without penalty or special repayment charges. Many commercial lenders seek to attach prepayment charges that have a fixed rate of interest in order to ensure that a minimum rate of return is earned over the projected life of the loan.
Hidden Costs and Fees
These might include closing costs, processing fees, filing fees, late charges, attorneys’ fees, out-of-pocket-expense reimbursement (courier, travel, photocopying, etc.), court costs, and auditing or inspection fees in connection with the loan. Commercial lenders may also impose depository restrictions, such as a restrictive covenant to maintain a certain balance in your company’s operating account or to use the bank as a depository as a condition to closing on the loan.
The information contained in this article is for generalized informational and educational purposes only and is not designed to substitute for, or replace, a professional opinion about any particular business or situation or judgment about the risks or appropriateness of any financial or business strategy or approach for any specific business or situation. THIS ARTICLE IS NOT A SUBSTITUTE FOR PROFESSIONAL ADVICE. The views and opinions expressed in authored articles on OPEN Forum represent the opinion of their author and do not necessarily represent the views, opinions and/or judgments of American Express Company or any of its affiliates, subsidiaries or divisions (including, without limitation, American Express OPEN). American Express makes no representation as to, and is not responsible for, the accuracy, timeliness, completeness or reliability of any opinion, advice or statement made in this article.
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A version of this article was originally published on June 15, 2015.