Business Finance Odds And Ends: Understanding Non-monetary Loan Terms

Business loans have ancillary terms and conditions which govern the actions of the borrower and provide remedies for the lender. The smart borrower knows where the miscellaneous landmines are buried in the business loan and takes action to limit lender interference in daily operations. After all, you want to focus on maximizing the value of your business and that happens through intensive focus on your core activities. Your time spent on minding loan matters is time not available to work on growing your business.

Here is a quick list of some critical non-monetary ancillary loan terms and what they could mean for your business.

Participant Lenders: Your lender may have the right to add participant lenders to your loan, sell down its own position or entirely exit the deal. Lenders buy and sell participation in loans to balance their portfolio risk and free capital for new loans. The originating lender is one you trust and have established a relationship. You get servicing benefit from keeping the originating lender in the deal. It is someone you can call to get an answer or action. Be aware of lenders that have a small hold level in the loan but have a disproportionate amount of control over major decisions. Know which lender can approve borrower requests on its own which is also known as agent approval. The big decisions will usually require majority lender consent also known as requisite lender approval. Work closely with your attorney to draft language during loan negotiation to limit unintended consequences from changes to the participating lenders.

Estoppels and SNDA's: These are legal documents the lender wants from third parties that provide income or services to the borrower. The tasks of preparing, distributing, tracking, negotiating and securing final documents is time consuming and costly. Try to limit the number of required estoppels and subordination, non-disturbance and attornment agreements and get a lawyer's review of the documents before distribution and signing. You will likely be responsible for returning a minimum acceptable number of these documents in order to close the loan.

Financial Reporting: Ask the lender to limit your financial reporting requirements to the information you already provide in the normal course of business. Make sure your financial reporting team has enough time and the technical capabilities to produce the required reports. Keep an accurate calendar of financial reporting deadlines to avoid a loan default. Avoid audit requirements and limit the lender's right to inspect your records to normal business operating hours.

Assumptions and transfers: A lender wants to limit your flexibility to assign the loan to another borrower. You want the ability to move the loan along with the sale of the collateral. The lender wants to keep your company in the deal while you want the flexibility to buy and sell ownership interests in related entities. Transfer restrictions are dormant loan landmines that only get attention when you need to affect an ownership transfer in your business, a related entity or the collateral. There are few things more frustrating then running the traps of lender consent at the eleventh-hour for a strategically planned business acquisition or sale. Hire a great business lawyer who can effectively document the necessary transfer and assumption language you need.

Closing requirements: Be sure you can meet the conditions to close and fund your loan. You might be required to meet a certain maximum loan-to-value or have achieved a minimum operating level for the collateral before loan funding.

Alterations and casualty thresholds: Preserve your right to use your cash to make physical modifications to the loan collateral without the lender's consent. The loan agreement may have a dollar limit above which lender approval is required. The same logic applies to casualty losses. Get the ability to receive some of the insurance proceeds directly and use the funds to restore the collateral without the lenders interference.

Exclusive look: Avoid giving the lender a stand-still period where you are restricted from looking for financing whether on a project specific basis or portfolio wide. A window for attractive financing may close if you are sitting on the sidelines waiting for your lender to approve your loan. Being locked out from finance activity if your deal falls apart puts you in a poor position. However, preserve your lending relationship by respecting your lenders need to get through its credit approval process before you jump to another loan proposal.

It's the little things that can injure your business. Get expert legal assistance during loan documentation. Pay attention to the small details in your loan to avoid a big surprise later and have the most productive borrowing experience.