Commercial loans are a lifeline for many businesses, providing the necessary capital for growth and operations. However, these loans can also come with risks for lenders. To protect their interests, lenders rely on carefully written commercial loan documents. From promissory notes to security agreements, these documents must clearly define the loan terms and outline the rights and responsibilities of both parties.
Default provisions
Default provisions are the backbone of loan documents. They clearly define what counts as a default, which can include:
- Missing payments
- Breaking promises made in the loan agreement
- Significant changes in the borrower’s financial health
Loan documents might also include a “cross-default” clause. This means that if the borrower defaults on another loan, it can trigger a default on this loan, too. It can serve as an early warning system for lenders.
Collateral agreements
Collateral agreements are another crucial part of loan documents. They describe the assets the borrower pledges to back up the loan. These agreements need to be crystal clear about what the collateral is and how much it’s worth. They also give the lender a “perfected security interest” in the collateral. This means that the law recognizes and enforces the lender’s claim to the collateral against the borrower and other creditors in case of default.
Remedies and enforcement
If a borrower defaults, lenders need options. That’s where remedies come in. These are the actions a lender can take if the borrower doesn’t hold up their end of the deal. Common remedies include:
- Demanding immediate repayment of the entire loan
- Taking possession of the collateral
- Appointing someone to manage the borrower’s business
While these remedies might seem harsh, they’re designed to protect the lender’s investment. Loan documents often include “notice and cure” periods as well, which gives borrowers a chance to fix the problem before the lender takes action.
It’s important to strike a balance
Well-drafted loan documents are essential for protecting lenders’ interests in commercial loans. They provide clarity, set expectations and outline consequences if things don’t go as planned. However, it’s important to remember that these documents should strike a balance between protecting the lender and being fair to the borrower. It’s crucial to seek advice from an attorney when drafting or reviewing commercial loan documents.