Small business borrowers should read completely, loan documentation, before you sign it. During my bank lending career I have made many hundreds of loan and do not remember a borrowers their credit documents read. Now that I am a consultant, is the entrepreneur in the acquisition of a loan, I make sure that you read and fully Federal Government understand each specific loan.
Some entrepreneurs are surprised when they discover you several quarters after signing loan documents, the they are their loans in default, because it not, with one or more loan covenants. A way borrowers know what business permits expected, before they close at all on loan. Is even wiser to make alliances in the early stages, so that they can be negotiated if necessary.
Why do banks loan covenants? Simply put, banks their loan and the collateral for the loan to protect. To do this, they want to know that management goes, lead the business interests in the process professionally and to the protection of the Bank.
The lender will want to make sure that the business has a sufficient liquidity, so that it can pay all obligations in a timely manner, including your credit payment to the Bank. The Bank wants to ensure that the company maintains profitability, so can the resources (profits) to operate and grow. Finally to the Bank management to take to protect your assets and ensure that if there is a disaster of some kind, the company can repay the loan even.
Typical affirmative loan covenants:
Borrower agrees, maintaining different types of hazard such as property and casualty and general insurance.Borrower undertakes, maintain "Key player" life insurance on certain management.All taxes (in particular, 941) and State fees must be paid and kept current.Quarterly or monthly financial statement filing at the Bank.Accounts payable and accounts receivable report template monthly Bank.Alle shareholder loan for companies must be subordinated to the loans from the Bank.For large loans, a bank can require, that the financial statements "check one" or "audited" statement.Borrower undertakes liquidity and maintain performance indicators.Submission of annual corporate tax return submission of annual personal tax return guarantee personal.Often used negative loan covenants (borrowers prohibitions):
No changes in the management or merger without creditor Erlaubnis.Keine distribution of profits without the prior lender Zustimmung.Keine further loans from other sources to companies without lenders Zustimmung.Keine increase on owner's annual draw or distribution without the prior lender Zustimmung.Kein sale of devices without the prior lender approval.Loan Covenant problems are common with fast growing companies, because financial data is sometimes difficult to maintain. Liquidity and performance ratios are often difficult to manage for a fast growing company.
Let you to forget simple alliances as send sloppy on the Financials and tax returns on time. If you anticipate a problem with a Federal Government, prepare a realistic plan to get your company in compliance and discuss with your banker as soon as possible. Most importantly, pursue your financial key figures on a monthly basis, so that you know that your business is healthy and able to thrive.
Sam Thacker is a partner in Austin Texas finance business solutions.
Direct E-Mail: sam@lesliethacker.com
Twitter: @ SMBFinance
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