Commercial Lending

Although Covid has likely caused banks to tap the brakes in some ways, historically low interest rates make for an attractive lending environment right now – especially if you’re a well-qualified borrower. And even if now’s not the right time to take on some additional debt to expand your business, almost all business owners are going to have to get bank financing at some point.  With that in mind, here are some points to consider.

1. Don’t Lie or Misstate Your Financial Condition.  Never make any false statements in a loan application or in any documents submitted to a lender – even if you’re in dire straits. Be forthright in disclosing your financial condition (and financial statements) to your lender. If you misrepresent your debts or financial condition, the law may well deem the loan as having been obtained through a fraud. In that event, the loan can never be discharged through bankruptcy. Even innocent “puffing” of your business may be construed as fraud if you default on the loan. As in all situations, honesty is the best policy.

2. Ask About the SBA.  The Small Business Administration (“SBA”) is a federal government agency charged with providing financial assistance to small businesses. Although the SBA no longer directly makes loans, it provides many programs designed to assist small business owners in obtaining credit for which they might not otherwise qualify.

The SBA’s primary loan program is called the “7(a)” and helps small business owners obtain bank financing by offering an SBA guaranty for a portion of the debt. In general, the loan proceeds can be used for a wide variety of purposes. Another popular SBA option is the 504 Loan Program. The 504 Program provides long term, fixed rate financing for major fixed assets such as land and buildings. These loans typically require a lower equity contribution than traditional bank.

Finally, note that the SBA has certain programs and products to assist those suffering from the pandemic.  More information can be found at: https://www.sba.gov/funding-programs/loans/coronavirus-relief-options

3. Understand What You Are Signing.  When closing a loan, you will be presented with many different documents that must be signed. Many of the documents are familiar to all - -such as promissory notes and mortgages. Other documents are a bit more arcane.  However, there is no excuse for not reading every word of each document you are asked to sign. First, Illinois law dictates that oral statements from your lender are not enforceable when a written document creates the borrowing relationship. In other words, only the terms and conditions in the various documents control the relationship. Second, if you decide not to read so that you can later argue blissful ignorance, think again. Absent the most egregious of situations, you will be held to all of the terms and conditions in the documents you signed whether you read them or not. 

You also need to make sure that you understand each and every term. Understandably, lenders want to make sure that they will be adequately protected. Toward that end, many lenders require loan agreements that contain certain financial performance covenants. Failure to meet those benchmarks generally constitutes a default. The perils of not understanding such terms from the outset should be obvious.

You can also ask for changes – don’t just assume that the loan documents are set in stone.  I’ve seen so-called “standard” promissory notes that allow the lender to call the note at any time for any reason (a “demand note”), even though it was sold as a multi-year term loan.  Requests to eliminate such ridiculous terms are usually met with favorably.

Documents regarding collateral pledged to secure the loan should also be closely scrutinized. For example, most mortgages limit your ability to sell, pledge or transfer assets. If you subsequently pledge that collateral as security for another loan or transfer it as part of your estate planning, that could be deemed an impermissible transfer resulting in a default. Understanding these terms from the outset allows you to intelligently address the issues and resolve them with your lender prior to taking a step that could inadvertently constitute a default. If you don’t understand, ask your lender or your attorney.   

4.  Five “C”s. When applying for a commercial loan, keep in mind that most lenders evaluate the so-called Five “C”s. Lenders ask (a) do you have good Character, (b) do you have the Capacity to generate cash to pay the loan, (c) do you have sufficient Capital, (d) what is your financial Condition, and (e) what Collateral can you pledge for the loan.  To assist your lender and make the process easier, be prepared to provide your lender with good books and records and expect his or her analysis to be comprehensive.