Negotiating the Loan Agreement

NEGOTIATING A LOAN
AGREEMENT
Premiere Date, JUNE 3, 2014
NEGOTIATING A LOAN AGREEMENT: JUNE 3, 2014
FINANCIAL POISE, A DIVISION OF DAILYDAC, LLC©2014
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Practical and entertaining education for business owners
and executives, Accredited Investors, and their legal and
financial advisors.
For more information, visit www.financialpoise.com
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DISCLAIMER: THE MATERIAL IN THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY. IT SHOULD NOT
BE CONSIDERED LEGAL ADVICE. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE WHAT MAY BE BEST
FOR YOUR INDIVIDUAL NEEDS

ABOUT THIS EPISODE OF THE SERIES
• The Loan Agreement is the road map of most
loans. Banks and lawyers start out with a Loan
Agreement that is usually favorable to the
Lender. Some parts of the Loan Agreement may be
negotiable. This webinar will discuss the various
provisions of a Loan Agreement and how to
negotiate the negotiable provisions.
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Negotiating a Loan Agreement
• A. General Strategies
– 1. Negotiate every comma
– 2. Negotiate only most important provisions
– 3. Ambiguous vs. Detailed
• B. Commitment vs. Loan Agreement
• C. Specific Provisions
– 1. Prepayment ability
– 2. Default sections
– 3. Remedy Section
– 4. Change of Control
– 5. Non-recourse carve outs
– 6. Representations and warranties
– 7. Reporting Requirements
– 8. Careful drafting of definitions of covenants
– 9. Careful drafting of definitions of eligible accounts/inventory

General Strategies
• A. Negotiate everything
1. Pros
a) Allows you to trade this for that
b) You may get more than you expected (worst they can do is
say “no”)
c) Lender fatigue
2. Cons
a) Costs more on both sides
b) Starts relationship off on a sour note
c) Diminishing returns – most items are never going to come
into play
d) Takes longer to get to closing

General Strategies
• B. Negotiate only most important provisions
1) Pros
a) Saves you money in attorney fees
b) Starts relationship off on a good note
c) Fees being spent actually protect you on most important
issues
d) Cuts down time to close
2) Cons
a) There are marginal items that perhaps you could have
improved to your benefit
b) Less to trade on with lender

General Strategies
• C. Ambiguous or Detailed – some pros can also be cons and vice -versa
– 1. Ambiguous Pros
• Ambiguous provisions of a loan agreement are generally construed against the drafter by
courts/judges. This can work to a borrower’s advantage
• Ambiguity allows for a borrower to argue to its lender what was meant by certain provisions after loan
officer is no longer at the bank
• Depending on the provision that is ambiguous, borrowers may be able to stretch the true intent of the
parties to its advantage.
– 2. Ambiguous Cons
• Ambiguous terms can lead to long, expensive litigation that could result in ambiguity being decided in
favor of opposing party
• Ambiguous provisions can lead to breakdown of long standing relationships between a borrower and
its lender. Inevitably you end up arguing over what was meant. Arguments between a lender and its
borrower are never desired.
• Uncertainty in lending atmosphere can lead to fewer loans.
• D. Negotiating the Commitment Letter – When is it too late to negotiate Business
Terms?
– 1. Never too late- however, arguing business terms on the last draft of a loan agreement can
cause hard feelings and a bad start to a new lending relationship.
– 2. Some business terms are still unsettled at term sheet time. OK to negotiate during due
diligence
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General Strategies
• E. First steps in Negotiating Loan Agreement
– 1. Business Level
• Check with client to get goals/most important elements
• Check with client to understand its risk tolerance
• Check with client to see what other options are available if loan falls through due to negotiations
• Understand your client’s business and how it operates – for instance, does the borrower send out bills when it ships,
when the order is placed or some time after shipping. This could make a difference in a borrowing base definition of
eligible receivables.
• Review business terms of the loan as client understands them
• Attempt to discover bank’s/individual loan officer’s reputation for negotiation
– 2. Legal Level
• Check with client to get goals/most important elements
• Investigate lender’s counsel to determine ability and propensity to negotiate
• Make sure client’s legal house is in order (operating agreement, standing with the state, resolutions to borrow,
authorized officers, etc..)
• Read every word of every document – even the boilerplate. Every word means something.
• Check Venue/Jurisdiction to make sure it works for borrower
• Make sure defined words (words that start with a capital letter) are actually defined somewhere
• Make sure definitions work for how business operates
• Make sure business terms in documents match business terms in term sheet and borrower’s intent
• Go over representations and warranties with client to make sure they are true and accurate
• Make sure name of borrower matches official name with Secretary of State
• Eliminate any section that is not applicable – many lenders use form documents that contain provisions that do not apply
to each deal.
• Check to make sure default, reps and warranties sections are consistent amongst all loan documents
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Negotiating Specific Provisions
• 1. Defaults - be crystal clear
a) nonpayment - no cure, no notice vs. notice and
cure. 5-7 days is reasonable
b) default in any other agreement with lender.
c) default in any agreement with anyone else
(materiality standard is appropriate here).
d) borrower or guarantor filed BK, ABC,
receivership. If multiple guarantors, perhaps carve
out non-material guarantors
e) involuntary BK - give 60 days to get out.

Specific Provisions
f) change of control (see below)
g) death of guarantor - soft death (chance to
replace within a certain time period).

Specific Provisions
• 2. Change of Control
a) Carve out family
b) Carve out less than x%
c) Carve out inter-company
d) Particular individual

Specific Provisions
• 3. Material Adverse Change – try to remove if
you are a borrower.
– Tough to define up front
– Tough to determine during active loan if this has
occurred.
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Specific Provisions
• 4. Representations and Warranties
a) Knowledge qualifiers
b) Without further investigation qualifier
c) True when made only
d) Environmental concerns
e) Specific Real Estate considerations
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Specific Provisions
• 5. Covenants
a) Test all financial covenants – make sure you understand
them and can run them the same way as the lender
b) Carve out debt limits
c) Carve out transfer issues
d) Specific Real Estate considerations
• No requirement to replace if rehab happening
• Ability to contest taxes
• Consider how much lender input is required for new leases –
perhaps limit lender’s consent by size or dollar amount, not
required for renewals
• Consider dollar limitation requirement for lender’s consent to
changes to the property
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Specific Provisions
• 6. Definitions
a) Eligible Accounts/Inventory
• Check eligibility time limits – ok to negotiate if business does not
operate under standard net 30 terms
• Inventory eligibility – ok to negotiate if slow moving items are
staples that can be sold at any time
• OK to negotiate extension of eligibility time for historically slow
paying customers that always pay in the same time period
(customer for the last 5 years has always paid a/r on the 100 the
day)
b) Financial Terms/Ratios – make sure definitions work. Talk to
borrower’s accountant to make sure.
c) Does “borrower” include subsidiaries? Should it?
d) Does “Liabilities” or “Obligations” include other debt on other
loans borrower has with lender. Should it?
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Boilerplate
• A. Waiver of jury – good for
lender, bad for borrower. Usually
not negotiable.
• B. Venue and jurisdiction – check
to make sure they work for
borrower. Lender may control this
though.
• C. Notices – make sure notice
sections filled out with proper
address
• D. Service- service by mail – good
for lender, bad for borrower.
Service when deposited in mail –
good for lender, bad for borrower

MORE ABOUT THE FACULTY:
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William Schwartz
Bill is a partner in the Banking & Restructuring Group of Levenfeld Pearlstein, and
concentrates his practice on representing borrowers and lenders in financial
services, litigation (including bankruptcy) and workouts. Bill takes a complete
approach to client service. He works to achieve the results his clients want, and in
doing so, he also strives to make the experience of working together a positive
one. Bill recognizes the time constraints facing his client, and works to reduce the
distractions often caused by focusing on the “small picture.” He believes that
communicating with your attorney and boredom do not have to be synonymous. As
a result, he takes a real interest in his clients and strives to consistently demonstrate
that in his frequent interactions. He also represents receivers in foreclosure cases,
buyers and sellers at UCC sales, buyers from assignees for the benefit of creditors,
and buyers of notes and mortgages. In the few years, Bill co-authored the chapter
“Federal Court Receiverships” in the book Strategic Alternatives for Distressed
Businesses (Thompson-West 2013) and an article in Buyouts Magazine entitled
“Buying Distressed Assets Outside of Bankruptcy” (Thomson Reuters, June, 2010).

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.
Matt Thiede
Matt Thiede – Managing Director – O’Keefe LLC Matt’s vast experience as a financial leader in
public accounting and industry provides a strong foundation to provide creative solutions to
client problems. He quickly analyzes client situations, performs detailed analysis and develops
restructuring plans needed in turnaround consulting, forensic accounting, bankruptcy and
insolvency services, litigation, and business valuation. Mr. Thiede joined O’Keefe after 15 years
of experience where he served as a financial executive in publically traded and privately held
businesses accumulating broad experience in the acquisition and turnaround of financially
distressed businesses including two private equity backed companies. He has successfully
turned around underperforming businesses, negotiated with lenders that wanted to liquidate
his companies, and worked with shareholders with disparate interests, while working with
turnaround professionals. His experience in negotiating complex credit facilities proves to be
invaluable to his clients. Additionally, he is experienced in serving as a financial expert in
complex litigation cases, and business valuation. Mr. Thiede is a registered CPA in the State of
Illinois, is a Certified Valuation Analyst (CVA), and holds a Bachelor of Science in Accounting from
DePaul University and a Master of Business Administration in Entrepreneurship from Kellstadt
Graduate School of Business in Chicago, Illinois.

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www.accreditedinvestormarkets.com

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www.dailydac.com

Negotiating the Loan Agreement

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