Even though you may be charged by the lender for it to prepare the documents for your loan and they are presented as the lender’s standard or customary documents, beware of the hidden provisions that always benefit the lender and never the borrower. Even if the lender says they are “non-negotiable”, you need to be aware of them to avoid an unintentional default or provisions that could overly restrict you or your businesses’ future credit or activities.
Some hidden loan provisions include:
- Security Interest. This pledges the borrowers’ assets, future assets and proceeds as collateral to repay the loan before they can be sold outside of the ordinary course of business or used to secure other credit, or make other borrowing difficult.
- Negative Pledge. While not a lien on the borrower’s assets, it prevents borrowers from using its assets to secure other credit.
- Enforcement Costs and Fees. In the event of a dispute, the borrower pays its own and the lender’s costs and fees. Better to have the “prevailing party” be entitled to costs and fees.
- Reporting and Liquidity Requirements. These can render the borrower in default for financial dips and delays, and could be costly for the borrower to comply.
- Cross Collateral/Default. These provisions may result in a default of this loan because of a default on another loan.
- Management/Ownership Charges. New owners or managers could enable a lender to claim a default or call the loan.
- Insecure lender. If the lender becomes “insecure” with the loan, collateral, borrower or due to actions of third parties it could declare a default.
- Guarantors and Personal Liability. While it is the obligation of the borrower to repay the loan these provisions make other persons or entities also liable for the debt.
- Warranties and Representations. Be sure they are appropriate and accurate when made, when the loan funds and thereafter.
- Assignments/Negotiability. These allow the lender to sell the loan and can limit the future operation and funding of your business.
If you have any questions about your existing or future loan documents, please contact us.