Michigan

The Importance of Scrutinizing the Details in Loan Agreements

Most Michigan businesses need loans from time to time to stay afloat and reach their strategic goals. Most loan agreements are very long and complicated documents, and are carefully designed to protect the lender's interests. Loan agreements typically contain a lot of "legalese", and technical language regarding interest rates, repayment terms, representations, warranties, conditions and covenants.

Although many commercial loan agreements are standardized, it is important for parties to a loan transaction to read and understand the terms of the loan agreement. This is because any party to a contract (including loan agreements) has a duty to understand and abide by the terms of the contract. Needless to say, no entrepreneur should sign a loan agreement without first consulting with an experienced business attorney.

There are a number of important provisions that should be carefully considered in any commercial loan transaction:

1. Receipt of Loan Funds. Will the money be delivered by check or wired into a bank account? Will all of the loan proceeds be disbursed at once, or will they be delivered in installments?

2. Loan Conditions. Most loan agreements contain certain conditions precedent that must be met by the borrower in order for the lender to be obligated to make the loan. It is imperative that the borrower read and understand each of these conditions .

3. Borrower's Covenants. Covenants are promises that the borrower makes to the lender relative to the loan transaction and repayment of the loan. If these covenants are breached, the borrower will be in default of the loan agreement, with the result that the entire loan agreement could be due immediately (i.e., acceleration).

4. Loan Repayment Terms. These must be scrutinized very carefully. Perhaps the most important repayment term is the right to cure a default due to a late or missed payment so that if one of these unfortunate events does happen, it will not mean an automatic acceleration of the entire loan amount. Most lenders do not voluntarily offer to include this kind of provision in their loan agreements, but oftentimes it can be included through negotiations.

Again, any Michigan business or entrepreneur who is getting a commercial loan should consult with an experienced Michigan business lawyer before signing a loan agreement to ensure their rights are protected and they have an accurate understanding of their rights and responsibilities under the loan agreement.

Full post as published by Michigan Business Lawyer Blog on November 12, 2008 (boomark / email).