December 2022 - MPL Law Firm

Time To Close the Loan? Will This Ever End?

Is this loan approval process ever going to end? It can certainly feel that way. However, be assured that if you have received, reviewed and approved the loan agreement and met all the lender’s pre-closing requirements, it will happen soon enough.

As a last step, it’s important to understand what you will be doing the day of the closing. Typically, you get a loan closing checklist from the lender or your business counsel. This document lays out everything you will be signing or will need to bring the day of the closing. Please make sure you have an experienced business counsel who can explain these items if you have questions.

Below are some of the more common closing items/documents you will see besides the loan agreement:

Guaranty – This is the document, if required, that you or some other person or entity will sign to ensure that the loan gets paid in case you default.
Legal Opinion – This is basically the opinion of your attorney or other loan counsel which basically says the loan is enforceable and you or your entity are legitimate.
Perfection Certificate – This document describes any collateral that you own and any other details about you or your entity (e.g., Name, Address, Insurance Coverage, Real Estate, etc.).
Schedules – These are attachments to the loan agreement which lay out any required disclosures that you need to make related to the loan (e.g., subsidiaries, existing debts and liens, real property, lender commitments, litigation, liabilities, required consents and authorizations, etc.).
Deposit Account Control Agreement – This agreement allows the lender (or secured party) to obtain control over your deposit account (or accounts) in the event of a default.
UCC Financing Statements – These documents (which are filed in the state or counties that you do business in) show the lender’s priority position versus other creditors for the assets you pledged as collateral for the loan.
Mortgage – If real estate is involved or you pledged your own real estate for the loan, you may be required to sign a mortgage.
Good Standing Certificates – If your entity is borrowing money, the lender will typically require that you provide a current certificate of good standing from any state your entity is registered.
Flow of Funds Statement – This document shows how much is being borrowed, what fees are being paid, any existing debt that is being paid off and the net amount of the loan proceeds being disbursed.
Payoff Letter – Existing lenders who are being paid off with the proceeds of the loan at closing send this letter to show the amount due.
Resolutions – If its your entity that is borrowing the funds, then you will need to provide the lender a resolution which says you have the authority to execute the documents and close.

There are many other documents that also could be required. It is important that you are working with experienced business counsel when taking on a business loan. Each of the lender required agreements has a particular purpose and should be understood by you or your team.

As a side note, this will be the last MPL General Counsel Corner for 2022. We want to wish everyone a Merry Christmas, Happy Hanukkah and Happy Holidays. We look forward to reconnecting in 2023.

Other items of interest:

Hiring, Firing and Inspiring: Navigating 2023’s HR Challenges (eisneramper.com)

As always, please don’t hesitate to email myself (jsanders@mpl-law.com), Andy Miller (amiller@mpl-law.com), Christian Miller (cmiller@mpl-law.com), Erik Spurlin (espurlin@mpl-law.com), Brad Leber (bleber@mpl-law.com) or anyone in our office with questions or comments.  

Please see all of our prior updates at this link or if you would like to be added to our email list, please click here.

One Page or the Next Edition of War and Peace – Key Loan Agreement Provisions

All the terms have been agreed to and now it’s time to cross all the t’s and dot all the i’s. The next step in the borrowing process is to review the loan agreement. It can be as short as one page or the next edition of War and Peace.

Regardless of the size, it’s important that you review this agreement with a professional business advisor. Of note, I want to highlight some key provisions outside of the normal interest rate, term and repayment schedule sections which should be understood. Below is an overview of a few of the important, but not as well understood provisions:

Default Provisions – these are the situations that put you in default with the lender (e.g., bankruptcy, closing a business, not providing required financial reporting); this will trigger automatic repayment or default interest (see below);
Default Interest – this is the interest rate that the lender will charge when you are in default under the loan; it is typically 2% or more on top of the loan’s base interest rate;
Negative and Positive Covenants – these are the things that you must (Positive Covenant; e.g. providing financial information, keeping assets in good working order, reporting under certain accounting standards) and cannot (Negative Covenant; e.g. selling assets, incurring more debt, paying dividends) do while the loan is outstanding;
Guarantees and Securitization – this is where an individual or a company guarantees payment of your loan in the event you or your company defaults; you may also execute and file a security agreement for your assets as well (e.g. a security agreement and UCC filing).
Prepayment Terms– this governs when or if you can prepay your loan before the term expires; sometimes a lender will prohibit repayment for an initial time period or they may let you prepay with a penalty payment.

There are other provisions in the loan agreement which are also important to understand in addition to the items listed above. As mentioned earlier, I highly recommend that you engage a professional business advisor to review your loan agreement prior to execution. Many times, there are terms that can be negotiated and provide more flexibility for you and/or your organization.

Next week, we will review the closing process and some of the peripheral agreements and documents you may be required to execute.

A few things that may be of interest:

What are the Differences Among State Pass-Through Entity Taxes (“PTETs”) (eisneramper.com)
Economic Review: December 2022 – Silvercrest (silvercrestgroup.com) (this article has some interesting charts showing where key inflation measures are currently sitting)
Business Owner Exit Challenges – Part I: Emotions (genequityco.com)

Ladies and Gentlemen, We are Now About to Begin the Pre-Boarding Process – Term Sheets and Commitment Letters

Term sheets and commitment letters are often used interchangeably, but they serve two distinct purposes. The term sheet will lay out what the lender will provide in the way of financing and also outlines your obligations, but it is non-binding. The commitment letter is the next step where the lender says you met all their pre-conditions and are ready to close.

These pre-closing components are kind of like all the pre-boarding steps when you get to the airport. Before you get on the plane, you have to check your bags, go through security, wait for your boarding position and meet any one of a number of other requirements before you actually get on the plane. At times, it can feel like you will never take off. Term sheets and commitment letters can sometimes feel the same way. However, once you meet all the pre-boarding steps, you will eventually get to a closing and the financing will occur. Below are more details on each.

TERM SHEET

The term sheet is the lender’s way of telling you what they are comfortable offering under the information you supplied. Of course, they will want to verify everything, which is why a term sheet is just a preliminary and non-binding commitment. It will typically lay out the following information:

Borrower information
Size of loan
Interest Rate
Term of the financing
Prepayment option/penalty
Assumptions that need verified
Covenants (i.e., what you can and can’t do)
Closing deliverables; and
Required guarantees and securitization of collateral

COMMITMENT LETTER

A commitment letter is the next step in the process where the lender has approved the loan and is ready to close. It provides more certainty to the borrower, but there will typically be disclaimers that are inserted (e.g., if the business unexpectedly closes or something happens that materially changes the conditions required to close the loan). However, once you receive the commitment letter, the odds are high that you will go to closing.

Next week, we will review the loan agreement in more detail and highlight some of the key provisions.

A few things that may be of interest: