Bank Financing Guidance
And Considerations
Understanding Your Loan Agreements
Trust and transparency matter – in life and in
your business. Having spent nearly 30 years in
accounting and finance, I’ve certainly learned
many lessons in this regard. When I started
in banking, I could tear off a commercial
note from a pad; fill in the company name,
rate and term; have both parties sign and be
done. A number of years later, the number of
pages needed to execute a similar deal is in
the hundreds.
What exactly does this change mean for you?
Well, beyond killing more trees or occupying
a few more terabytes of storage space in
the cloud, it means that it’s imperative to
have a thorough understanding of your loan
agreements. Of course, with a few notable
exceptions, no financing provider is out to be
purposely vague in its deals. However, largely
due to regulatory and legal pressures, loan
documentation can now be quite complex.
Here are some key points to consider:
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maturity date, and the borrowings are
advance rates? For example, accounts charge coverage, net worth (tangible or
receivable older than 90 days from GAAP), working capital, leverage, etc.
invoice are typically excluded, as is older With covenants, it’s best to understand
inventory and retainage (for construction precisely how they are defined, and
companies). Another point to consider is when they are tested. Covenants provide
a taint rule clause, which can exclude all a measure of discipline, but their true
receivables from a customer if a portion purpose is to get both parties back to the
(usually 25 percent) is considered stale. table to discuss a significant change in
Customer concentration limits. Be
the operating profile.
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Hidden risks. Risks can include asset
customer may inhibit your borrowing sale/purchase limits, change in control
capacity. It’s best to always communicate versus change in ownership, material
with your lender when something out of adverse change clause, cross-default,
the ordinary arises. swap agreements or change in law/
Guarantee. If you’re required to
limited, continuing or secured? Also,
does it provide for a spouse or primary
residence exclusion? All are important
points to consider.
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Covenant definitions. This can cover
debt service coverage versus fixed
guarantee your loans, is the guarantee
is it – demand or commitment? With
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collateral defined and what are the
aware of how a large order from a single
Line of credit. What type of loan facility
a demand facility, there is no defined
Borrowing base. How is eligible
Collateral.
How
come in to play. I’ve seen unfortunate
situations whereby a change in statute
created a technical default for a borrower.
Generally, these can be avoided with
good, up-front communication and
understanding on both sides.
is
the
loan
at the bank’s discretion. A committed collateralized? Is there a blanket lien
facility has a specific maturity date. A or specific asset filing? Be particularly
demand facility is cheaper for the bank, aware
and thus typically less expensive for the this can place additional assets at risk.
borrower. A committed facility carries However, it may also allow you to
a higher degree of comfort for the achieve better rates and terms. Similarly,
borrower. Both have their advantages. are outside ventures co-mingled with a
of
statute. Any number of these risks may
cross-collateralization
as
cross-guarantee or cross-collateralization
clause? I’ve seen issues with outside real
estate investments (unrelated to the core
operating business) cause defaults with
Ultimately, a thorough understanding of
your loan agreements can help de-risk
your business and add value when you
look to grow. This can be achieved through
purchasing additional equipment or real estate
or perhaps an acquisition or liquidity event. In
my view, it is a best practice to arrange a sit-
down with your financing provider and CPA
together. Transparency and communication
with all parties in the same room generally
fosters tremendous ideas and benefits for your
business. Give us a call to learn more.
perfectly healthy businesses. The best
practice is to try to wall-off investment
real estate. In fact, seasoned developers
by: Doug Houser,
try to do this with every separate project.
CPA, CEPA, MBA
Principal,
Director of Construction &
Real Estate Services
614.314.5937
[email protected]
Rise & Shine • Spring 2019
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