Important Information about Business Loans

With access to capital at a premium in the current economy, it is important for potential business borrowers to bear in mind certain essential terms to any loan.

1. If the loan is to be secured by real estate, taxes are payable on the recordation (sometimes close to 5% of the secured loan amount) unless the grantor of the lien is a party other than the borrower. Consider structuring the loan so that the borrower is a related entity and the real estate-owing entity is a guarantor that secures its guaranty with a lien on the real property.

2. A lender typically will want a personal guaranty of the loan from principals of the business. Though this may be unavoidable, consider trying to limit individual exposure as to the scope or duration of the guaranty or as to the individuals on it. If just one spouse in a married couple signs a guaranty, liability is limited to property held in that spouse’s sole name. By and large, in that case, liability would not extend to property held by the couple jointly, as “tenants by the entirety”, because property held that way is reachable only by a creditor of both spouses.

3. Any default on the loan should be conditioned on the lender first giving the borrower written notice and a few days to cure any defaults for non-payment, and 30 days to cure defaults other than for non-payment. Especially for defaults for non-payment, the point is to avoid inadvertent default, if the borrower simply forgets to pay.

4. The business borrower may have certain pre-existing payment obligations – on loans from officers, bonus plans, deferred compensation arrangements and the like. While giving the lender first priority, the loan document should recognize such pre-existing obligations and permit payments to continue so long as no default occurs with the lender.

5. Lenders typically require that business borrowers insure their property, which is the lender’s collateral, at certain levels. Sometimes the lender will require that the insurer be subject to lender approval. In that case, consider offering to confine the choice of insurer to one meeting a certain industry rating standard that is satisfactory to the lender, rather than giving the lender veto power over the insurer. That way, the business borrower preserves some freedom to shop around.

There are many more important considerations to discuss with a lender, and for which a lender may grant some leeway, in arranging a loan. Circumstances differ for each borrower, which is why it is best to ask a lawyer for further advice in any borrowing transaction.