Key Takeaways

• While the commercial loan process can be complex, a skillful attorney can protect your interests, whether you are the borrower or lender.
• There are various phases involved in the process of securing a commercial loan, from establishing the framework, to conducting due diligence, negotiating the terms, and finalizing the agreement at closing.
• Both parties should have legal counsel by their side after the transaction has been completed to ensure ongoing compliance.

Commercial loans play a pivotal role in business, enabling companies to secure financing, expand their operations, and achieve their objectives. Whether you’re a borrower seeking capital or a lender providing it, having legal counsel by your side is crucial to ensure your interests are protected. While every transaction is unique, based upon the needs of the borrower and the requirements of the lender, most commercial loan transactions follow a similar framework. A skillful business attorney can guide you through every step of the process, ensure each legal document accurately reflects your agreement, and inform you of any risks along the way.

The key stages of a commercial loan transaction are as follows:

Establishing the Framework

The term sheet is a non-binding document that establishes the framework for the loan. It is meant to provide a roadmap for negotiations and ensure that both parties agree on the terms before proceeding forward. Neither party is locked in to the terms until the final agreement is signed. Specifically, the term sheet covers:

• Financial terms: The term sheet defines the interest rate, repayment schedule, monthly payments, and any applicable fees.
• The conditions of the loan: The terms sheet outlines what conditions must be met before the loan closes.
• Required collateral: Any assets required to secure the loan must be specified on the term sheet.
• Timeline: It’s crucial to outline the timeline for the closing date of the transaction on the term sheet.

Ultimately, the term sheet can save both parties time and money on legal fees and drafting agreements until the core terms and key provisions are set. An attorney can assist the party they represent with identifying risks, negotiating clauses, and ensuring the terms are fair before the agreement is signed.

Conducting Due Diligence

Once the parties agree on the terms of the transaction, both the lender and borrower will need to conduct their due diligence. This is a crucial stage that allows each party to investigate facts and evaluate risk. It involves a comprehensive review of financial records and legal documents. A lender would assess the borrower’s financial health, corporate structure, market position, and ability to repay the loan. A borrower would look at the long-term impact securing the loan would have on their business, their financial obligations, and the flexibility of their operations.

A knowledgeable attorney can help a borrower or lender navigate the due diligence phase of the commercial loan process, respond to any requests for information from the other party, and address inquiries. In addition to safeguarding their client’s interests, they can ensure this stage goes smoothly.

Formalizing the Agreement

Once the due diligence phase has been completed, the agreement must be formalized using the framework of the term sheet. The lender’s attorney will prepare the initial drafts of the documents needed for the loan. These include the credit agreement, security agreements, mortgages/deeds of trust, pledges, guaranties and any ancillary documents. The borrower’s attorney will review these documents and negotiate the terms if a provision is not in the term sheet. They will also review or prepare the internal approvals, consents, and waivers required to authorize the transaction.

Engaging in Negotiations

The commercial loan process often involves rigorous negotiations between the attorneys for both sides. While lenders seek protective measures and stringent financial covenants to secure their interest, borrowers strive for operational flexibility without excessive oversight by lenders. During negotiations, legal counsel will work closely with their client to ensure they understand their goals and the loan terms align with their business objectives.

Finalizing the Transaction

After negotiations have been concluded, the parties and their attorneys will finalize the transaction at closing. Each side will conduct a final review of the documents and sign them. There may be an escrow agent present to serve as a neutral third party and ensure funds are handled in a secure manner, in accordance with the terms set forth in the loan agreement. Although closings may occur in person, they are more commonly conducted by video conference or email to streamline the process.

Ongoing Compliance

The commercial loan process doesn’t end with the closing. The borrower is required to adhere to the repayment schedule and covenant obligations in the agreement. A lender must monitor the loan, track the status of the collateral, and ensure compliance. In addition, both parties will collaborate on any post-closing deliverables, such as deposit account control agreements, bailee agreements, or landlord waivers, to finalize the requirements of the transaction. Whether they represent the lender or the borrower, an attorney can assist their client with ensuring their obligations are satisfied while assisting them with mitigating risk and providing the counsel they need. Also, if it is an inventory sale or accounts receivables based loan, a borrowing base certificate needs to be negotiated and drafted.

Contact an Experienced Oklahoma Business Attorney

Both lenders and borrowers must take the necessary measures to protect their business interests when engaging in a commercial loan transaction. At Titus Hillis Reynolds Love, we are dedicated to providing our commercial clients with the counsel they need to help ensure the success and longevity of their business. Contact us today to schedule a consultation and learn how we can help.