Cross the T’s and Dot the I’s – Loan Agreements

June 24, 2024

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.