Bank Loan Documentation and Conditions

Bank Loan Documentation and Conditions


Banks have well established procedures for structuring, approving and documenting loans. When you open a bank account or seek a loan, the bank's standard terms and conditions will apply and set out the procedure for regular transactions. Always ask the bank for a copy of their full specific standard terms. You should ask for a copy for loans and other transactions. The bank will usually use standard documents. There is not much room to negotiate but you ought to ensure that you understand how the documents work. The bank's requirements may appear onerous but they are at least reasonably predictable.

Bank Loan Documentation and Conditions

When you are offered an overdraft or loan, the bank will present you with a facility letter (in the case of an overdraft) or loan agreement containing the terms on which the facility or loan will be advanced. The bank will usually demand in order to secure repayment, a charge on your company's assets to secure repayment as a precaution against your defaulting. This will give the bank the right to appoint a receiver to take control of the business and its assets, to sell the assets and use the proceeds to repay the borrowings.

The bank will usually impose certain financial conditions, undertakings and warranties.

Conditions:

These include the requirement that your business must maintain certain financial ratios, e.g. borrowings to trade debtors; receivables to liabilities and indebtedness to shareholders funds; current assets to current liabilities; and current assets to borrowing. In addition there may be a condition that shareholders' equity be maintained at a particular level and that the value of the assets upon which the bank has security be maintained within a specified margin of borrowings. There are many such formulae and you may need professional advice to understand how they apply to your business.

Undertakings:

These are usually designed to prevent your company doing or omitting to do things which might jeopardise the bank's security, for example, failing to maintain insurance or disposing of material assets without their consent.

Warranties:

May also be required but these are commonly not particularly onerous. For example, to confirm that corporate administration at the Companies Registry is properly maintained. If you fail to observe conditions, undertakings or warranties, the bank can call for early repayment of the loan.

Guarantees:

The bank may well also require directors or the parent company of the borrower company to provide personal guarantees. You may appear to have little opportunity to negotiate terms. However, taking early legal/financial advice as to the significance of the conditions imposed can save problems at a later stage. You will be expected to pay the lender's legal and administrative fees on the transaction as well as your own.

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