It comes as a surprise to some when they are told that the vast majority of businesses that exist require credit from time to time, ranging from complex commercial loans to simple ’30 days to pay’ lines of credit from their suppliers. While getting your supplier to allow a month to pay is a relatively simple exercise, obtaining a commercial loan usually is not, and normally requires a commercial lawyer to advise upon it.
The reason is that commercial loans are given within the framework of legally binding obligations on both the bank that is lending and the business which is borrowing. The loan agreement is likely to be prepared and created by the lender, therefore it is imperative that the business or the individual who is committing to the commercial loan fully understands what the terms and their obligations are.
For a start within a commercial loan agreement, there tend to be several key clauses. These usually number seven, however, each bank may have additional clauses based on the specifics of the loan. If we stick with the standard seven clauses, here is a brief explanation of what each of them is and what they mean.
This is found in most legally binding agreements and in the case of a commercial loan agreement basically contains the basic information relating to the lender and the borrower such as their names, addresses, and any relevant dates pertaining to the agreement.
This is basically included to ensure that there is no ambiguity with regards to the terminology and the phraseology used throughout the loan agreement. It can include a definition of what each term means, similar to a glossary.
Condition Precedent Clause
This sounds more complicated than it actually is. All this clause does is set out that the money that is being loaned will not be transferred to the borrower unless and until the borrower completes all the necessary obligations in respect of their application and acceptance of the terms of` the loan.
Representation And Warranty Clause
This clause is the one which the lender includes to basically say that if they discover that any of the information which the borrower has provided turns out to be false or a misrepresentation of their situation, then the lender can withhold the loan. If the discovery happens after the loan has been transferred to the borrower, the lender can default the borrower, and demand immediate repayment of the loan.
Loan Term Clause
Fairly self-explanatory in the sense that the loan term clause outlines what the specific terms of the loan are with regard to the amount borrowed, the interest rate, the repayments, the length of the repayment schedule, fees, penalties, and where applicable, what property or assets are secured against the loan.
Covenant And Undertaking Clause
These are assurances given to the lender by the borrower that they will not indulge in any acts or behaviours that would put the borrower into a poorer financial position to the extent that they cannot afford the repayments.
Another relatively straightforward clause that states that neither the borrower nor the lender should divulge the details of the loan to third parties, with the exception of those that might have been involved in the loan agreement being completed, such as the borrower’s commercial lawyer. This clause can be optional and whether a commercial loan agreement includes it will depend on the specifics of the loan.