Finding Money Advice

With some exceptions, lenders will use standard loan agreements for loans of less than a million dollars. Those agreements will contain a number of obscurely worded clauses that will give the lender all kinds of rights to call the loan whenever they feel insecure about your ability to pay.

A good business lawyer will be able to help determine what’s negotiable and what isn’t. Notice that we said a “good business lawyer.” That means one who knows what to expect in bank documents. An inexperienced lawyer will run up your legal bill trying to change language that the lender simply will not change. By the way, in addition to your own legal bills, you’ll also be charged for the bank’s legal fees if they need to have their own attorneys involved. In the end, you’ll be poorer, but no more secure.

Unless you’re an attorney, you probably find reading legal documents about as much fun as watching paint dry, and not nearly as straightforward. Nevertheless, you need to understand the terms and conditions so that you don’t inadvertently trigger a default. We have a long list in the Finding Money ebook, but here are a couple of the more commonly misunderstood, though fairly standard, clauses you’ll find in your loan documents:

• Principal payable on demand, means just what it says, you owe them the money when they demand it, even if you don’t have it
• Right of setoff, allows the lender to collect money owed by withdrawing funds directly from your accounts (whether single or joint with others) without notice to you. This includes accounts in place at the time the loan was signed or any opened later
• Material adverse change clause, allows lenders to deny advances on established loans or accelerate payment of your loans if your business performance deteriorates

While the lender might allow minor changes to their standard clauses, don’t expect much. If you’re a long time customer of the bank, and your company is financially strong, you might encourage them to limit personal guarantees to just this loan (and not all future borrowings), you might ask them to state an amount on the guarantee (versus making it unlimited), and you might ask them to amend the cross-collateralization clause on any new loans that are well secured by new assets (such as an equipment loan).