Clint M. Hanni
April 2017

Loan transactions are document intensive. When the agreements have all been drafted and agreed, it’s time for the lender and borrower to sign the documents and fund the loan. Closings can be easy or hard. Here are some tips to make them as smooth as possible.

1. Authorizing resolutions. After the main transaction documents are complete, there may remain other documents to be drafted, agreed and signed. For example, the lender wants assurance that the borrower’s board of directors has authorized the loan. To that end, the lender may provide its own form of board resolution for the borrower. It can take time to organize a meeting or pass around resolutions for signatures. Borrowers should plan to remain involved and put in extra time even after the documents are finalized.

2. Closing certificates. Most loans in excess of a few million dollars will require officers of the borrower to certify that all representations and warranties are true and that all conditions to the loan have been met. Other certificates may be required with respect to resolutions, articles of incorporation and bylaws of the borrower. In addition, the lender may ask for a solvency certificate to confirm the borrower is solvent. Insurance certificates may be required. Here’s the point—a fair amount of work remains to be done after the main loan documents are complete. Finance counsel can walk you through it all.

3. Third party documents. Closings are often delayed because the lender requires third parties, such as landlords, to sign documents (e.g., consents to collateral assignments of agreements or landlord estoppels). An experienced lawyer will help the borrower identify these documents in advance so that they can be distributed to third parties well before the closing. Lenders may be willing to accept such documents on a post-closing basis.

4. Closing mechanics. In the old days, all parties used to gather in a conference room to sign and release deal documents. That rarely happens nowadays. Most closings are done via email with little face-to-face interaction. But loan closings are still complicated. Final versions of the documents need to be gathered and distributed to each side for signatures. Some documents, such as stock certificates to be taken by the lender as collateral, must be delivered to the lender’s attorney. The lender may require the borrower’s attorney to render a closing opinion that the loan documents are enforceable. Any escrow procedures must be complied with. Often, last minute issues rise up and threaten to derail the deal. It’s important that you have counsel that is experienced in running a closing to work around these issues. Visit https://www.richardsbrandt.com/practice-areas/banking-and-finance-law/

Read Tips for Borrowers Negotiating a Loan: Part 6 After the Closing

Clint M. Hanni
April 2017

Once you have agreed on a term sheet for your loan, it’s time to turn to the “definitive loan documents.” The first document to get drafted is the loan agreement.

1. 1. Get it reviewed by an attorney. The loan agreement contains the basic terms of the deal and describes what the bank will require the borrower to do beyond staying current on payments. All loan agreements are not the same. The bank may tell you it’s a “standard document” drafted by internal staff, but you can’t afford not to have it reviewed by a competent finance lawyer, potentially saving you thousands of dollars. If you decide to request a change in the document later, the bank will charge a modification fee. It’s best to get it right the first time.

2. Representations and warranties; schedules. Representations and warranties are statements of fact made by the borrower in the loan agreement, and any untrue statement could be grounds for the bank to call the loan. The representations and warranties may refer to schedules where the borrower discloses exceptions. The number one rule for preparing schedules can be distilled down to three words: tell the truth! Disclose any and all exceptions. If you are making a representation that your assets don’t have any liens other than as disclosed on a schedule, be careful to disclose all the liens on the schedule. As a borrower, it’s in your best interest to be thorough and inclusive.

3. Covenants. There are two kinds of covenants: thou shalt, and thou shalt not. Borrowers should pay special attention to covenants that restrict it from corporate actions, such as making distributions to its shareholders or members, selling its assets, merging with another entity or undergoing a change in control. Make sure you understand the limits imposed by the bank and can live with them.

4. Focus on costs and fees. Banks don’t just make money from interest. Every loan agreement will include other costs and fees to be paid by the borrower. For example, the lender may require the borrower to pay for an annual appraisal of its assets. Make sure you have already agreed to the costs in the term sheet. If not, don’t be afraid to push back. The bank may agree to cover the costs itself.

5. Events of Default. The events of default section is a list of events that allows the bank to require immediate repayment of all amounts outstanding. Generally, any violation of a representation and warranty or a covenant will be deemed an event of default after the passage of some period during which you can cure the problem. Don’t assume that the bank will only call the loan if you fail to make a payment. There are a multitude of other grounds for putting a loan in default. As with the rest of the loan agreement, it is important that you have this section reviewed by a seasoned credit finance lawyer. Visit https://www.richardsbrandt.com/practice-areas/utah/bank-finance-attorney

Read Tips for Borrowers Negotiating a Loan: Part 3 Ancillary Documents