advanced commercial loan documentation · 2016-05-31 · 11-6 russr ©2016 non-recourse loans: a...

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ADVANCED COMMERCIAL LOAN DOCUMENTATION

By: Robin Russell

CHAPTER 11 I. OVERVIEW ......................................................................................................................... 3

Definition of Commercial Loan ............................................................................................. 3 Regulatory Compliance ......................................................................................................... 3

II. COMMERCIAL LOAN PROCESS .................................................................................. 3 Overview ................................................................................................................................ 3 Loan Application ................................................................................................................... 3 Financial Information............................................................................................................. 4 Business Plan ......................................................................................................................... 4 Agreement on Terms .............................................................................................................. 4 Loan Documentation .............................................................................................................. 4 Participating The Loan ........................................................................................................... 4

III. CLASSIFICATION OF COMMERCIAL LOANS .......................................................... 5 By Security............................................................................................................................. 5 By Interest Terms ................................................................................................................... 6 By Funding Terms ................................................................................................................. 7 By Lender............................................................................................................................... 9

IV. TERM SHEETS ................................................................................................................... 9 Basic Terms ........................................................................................................................... 9 Detailed Terms ..................................................................................................................... 10 Commitment Letters ............................................................................................................ 12 Letters Of Intent ................................................................................................................... 13

V. LOAN AGREEMENTS..................................................................................................... 13 General ................................................................................................................................. 13 Basic Contents of Commercial Loan Agreement ................................................................ 14 Preliminary Statement .......................................................................................................... 14 Definitions and Accounting Terms ...................................................................................... 14 Commitments and Terms of Credit ...................................................................................... 15 Conditions of Credit ............................................................................................................. 15 Representations and Warranties ........................................................................................... 16 Covenants ............................................................................................................................. 17 Affirmative Covenants ......................................................................................................... 17 Borrower Specific Financial Covenants .............................................................................. 18 Negative Covenants ............................................................................................................. 19 Defaults ................................................................................................................................ 20 Miscellaneous ...................................................................................................................... 21

VI. GUARANTIES AND THIRD PARTY PLEDGES OF COLLATERAL ..................... 21 General ................................................................................................................................. 21

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Reasons for Guaranties ........................................................................................................ 21 Kinds of Guaranties ............................................................................................................. 21 Third Party Pledge of Collateral .......................................................................................... 22 Guaranty Substitutes ............................................................................................................ 22 Liability of Co-Guarantors .................................................................................................. 24 Subordination ....................................................................................................................... 25 Amount of Guaranty ............................................................................................................ 25 SBA Guaranties ................................................................................................................... 26 Bankruptcy Issues ................................................................................................................ 27 Upstream Guaranties ............................................................................................................ 27 Cross-Stream Guaranties ..................................................................................................... 28 Downstream Guaranties ....................................................................................................... 28 Attacks on Guaranties .......................................................................................................... 28 Documents Required for Guaranty of Business Loan ......................................................... 29

VII. LOAN CLOSING .............................................................................................................. 30 Closing Process .................................................................................................................... 30 Closing Date......................................................................................................................... 30 Closing Checklist ................................................................................................................. 30 Document Execution ............................................................................................................ 30 Wire Transfers ..................................................................................................................... 31 Payoff Letters ....................................................................................................................... 31 Post-Closing Documents ...................................................................................................... 31 Forms ................................................................................................................................... 31

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ADVANCED COMMERCIAL LOAN DOCUMENTATION

I. OVERVIEW

DEFINITION OF COMMERCIAL LOAN:

● A “commercial loan” is a loan that is made primarily for business, commercial, investment, agricultural, or similar purposes. The term does not include a loan made primarily for personal, family, or household use.

REGULATORY COMPLIANCE:

● Federal and state supervisory authorities impose numerous limitations and requirements on lending activities of banks and other regulated lenders. These include:

∗ maximum individual lending limits; ∗ restrictions on loans to directors, executive officers, and

examiners; ∗ restrictions on loans secured by the entity’s own stock; ∗ restrictions on loans to purchase or carry stock; and ∗ restrictions on individual types of loans.

Lenders must structure loans in compliance with their regulatory limitations.

II. COMMERCIAL LOAN PROCESS

OVERVIEW: ● The commercial loan process may vary considerably depending on the type and complexity of the loan, the particular lender’s practice and policy, and the regulatory scheme applicable to the lender. Generally, the process breaks down into four fundamental stages: application, agreement on terms, documentation and closing.

LOAN APPLICATION:

● The loan application is the applicant’s request, either verbally or in writing, for a lender to extend credit. It is the first step in the commercial loan process. Institutional lenders often require some form of formal written loan application in which the applicant presents financial information in writing. This gives the lender documentary evidence of fraud in the event the financial information is later discovered to have been materially misleading. A fraud cause of action requires a material misrepresentation, which was false, and which was either known to be false when it was made or was asserted without knowledge of its truth, which was intended to

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be acted upon, which was relied upon, and caused injury.

FINANCIAL INFORMATION:

● The applicant should be prepared to submit written financial information, which the lender will analyze to determine if the applicant has the ability to repay the debt. Some of the common documents required at the submission stage are as follows:

∗ a description of the nature of the business and the products or services it offers; the identity and background of key management;

∗ financial statements, including balance sheets, income and cash flow reports for a specified period time (usually three years);

∗ current aging of inventory, receipts and payables; ∗ sales, expenses and profits projections covering a specific time

period (usually one year) after the loan is to be made; ∗ if principal shareholders are guaranteeing the loan, the

shareholders’ personal federal income tax returns. BUSINESS PLAN: ● A business plan is a detailed description of the ownership,

management and operational strategy of a company. It also includes a description of how the company intends to execute its strategy and use the borrowed funds. Generally, the lender will also want to see the borrower’s business plan in addition to the financial information listed above.

AGREEMENT ON TERMS:

● Once the application process is completed, the proposed loan typically goes to a “loan review committee” within a financial institution for approval. Prior to submission of the proposed loan to the committee, the loan officer will draft, or will ask counsel to draft, a term sheet setting forth the terms on which the lender agrees to make the loan. The term sheet may be modified by the loan review committee as a condition to its approval. The term sheet may be presented to the borrower in the form of a loan commitment or a letter of intent.

LOAN DOCUMENTATION:

● In large commercial loans the lender typically requires a loan or credit agreement. The loan agreement is the contract that sets forth the terms and conditions of the loan and lending relationship. This is usually the primary loan document and often incorporates by reference several other loan documents such as a note, guaranty, security agreement or mortgage. At the loan closing all the loan documents are signed and the loan proceeds are disbursed.

PARTICIPATING THE LOAN:

● In a participation agreement, a lead bank initially structures and makes the loan as the sole lender. Either concurrent with or after the making of the loan, the lead bank sells a portion of that loan to

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another bank or banks under the terms of the participation agreement. See Chapter 17, “Participations.”

III. CLASSIFICATION OF COMMERCIAL LOANS

BY SECURITY: ● Loans are often categorized by whether or not they are secured by collateral.

Unsecured: Occasionally, a lender will require nothing more than the borrower’s promise to repay the loan. In large unsecured commercial loans the lender typically requires a “negative pledge” which is an agreement by the borrower that it will not pledge or grant a security interest in its assets to anyone else. Unsecured loans also typically contain restrictions on the borrower incurring additional debt. This gives the lender protection against other unsecured creditors who will compete with the lender for repayment.

Secured: Usually, a lender will want more than the borrower’s promise to repay; it will require that the borrower pledge property, either real or personal, or a combination of both, to secure the loan. After the loan closing, if the borrower defaults, the lender, after taking certain steps depending on the type of collateral, can take possession of and sell the pledged property, without the borrower’s consent, to pay the debt. Asset-based lending is a form of secured lending. On occasion, a lender will agree to look solely to the collateral for repayment. This is referred to as a non-recourse loan and typically the collateral is real estate.

Borrowing Base Loans: Borrowing base lending is a method of financing in which a loan is made for an amount that cannot exceed specified portions of accounts and inventory that secure the loan. Since the value of a borrower’s accounts and inventory is constantly changing, the availability of funds is constantly changing. Consequently, a precise formula is necessary so all the parties know the exact status of the loan. This is referred to as the “borrowing base formula.” Under the loan agreement the borrower is required to certify to the calculation under the formula on a monthly or quarterly basis by providing the lender with a borrowing base certificate. With a borrowing base, the receivables act as collateral for the loans, with the borrower retaining the risk as to its customer’s financial ability to pay the receivable.

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Non-Recourse Loans: A non-recourse loan involves an agreement by the Lender that it will look solely to the collateral securing the loan for repayment. There is no personal liability on the part of the borrower. Non-recourse loans are typically documented such that actual fraud on the part of the borrower in obtaining the loan converts the loan to full recourse. The most common type of collateral securing a non-recourse loan is real estate. A non-recourse loan to a partnership protects the individual partners who would otherwise be personally liable under general partnership law.

BY INTEREST TERMS:

● Loans are frequently classified by the interest rate charged on the loan.

● Fixed: If the interest rate does not change during the term of the loan, it is known as a “fixed” rate and is usually expressed as a percentage. An example of a fixed rate is 8.75%.

● Floating: If the interest rate changes during the term of the loan, it is known as a floating rate. Both the term sheet and the loan agreement should state both the index that forms the basis of the rate and the formula used to calculate any changes. Many financial institutions offer a choice of indices on which to base a floating rate of interest, some of which include the following:

* Prime Based: The most common index on which to base a floating rate of interest is known as the prime rate, which is the rate banks charge certain customers, some might say their “best customers,” to borrow money. However, most notes and loan agreements, when defining the prime rate, specify that it is not necessarily the bank’s best rate.

♦ Sample Provision: The term “Prime Rate” shall mean the prime rate per annum as announced from time to time by Lender as its prime rate of interest per annum, automatically, without notice to Borrower, fluctuating upward or downward on the day of each such announcement. Borrower understands that Lender’s prime rate may not be Lender’s best or lowest rate, or a favored rate, and any statement, representation or warranty in that regard or to that effect is expressly disclaimed by Lender.

Determined Internally Or By Publication: While some banks may determine their own prime rate, a prime rate is also published in several national newspapers, such as the Wall

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Street Journal based on the money center banks.

Prime Plus: If the rate is to be higher than prime, any increase is usually expressed as a percentage, such as “Prime + 1%.”

* Matched Funds Indices: Some floating rate indices are based on the concept of “matched funds.” This method involves matching what it would or might cost the lender to obtain in the market place a deposit of funds in an amount and for a maturity matching the principal amount and maturity of the loan to be made. From the lender’s viewpoint, this is simply a “cost plus” calculation.

* United States Treasury Bills: One base index is United States treasury bills. These bills, when purchased, are essentially loans to the United States government at a stated interest rate for a certain period of time. The lender always has the option to purchase these bills instead of loaning money to the applicant. They usually change daily and are also published in several national newspapers, including the Wall Street Journal. Any upward adjustment to the rate is usually expressed in “basis points” and one hundred basis points equals 1%. An example of such a rate is “200 basis points over the 1 year Treasury Bill, adjusted annually.”

* Eurodollar; LIBOR: Another basis for a floating rate is known as LIBOR, or the London interbank offered rate. This is the rate that London banks charge each other to borrow money. This index is also published in several national newspapers, such as the Wall Street Journal and usually changes daily. Any upward adjustment to the rate is usually expressed in “basis points” where one hundred basis points equals 1%. The LIBOR rate may be expressed as “200 basis points over the 90 day LIBOR rate, adjusted every 90 days.”

BY FUNDING TERMS:

● Loans are often classified by their terms of funding. A loan agreement may provide for a term loan, a revolving loan or both. Further, the revolving credit line may provide for the issuance of letters of credit.

* Term Loan: A term loan is a loan with a maturity date. It is the opposite of a demand loan, which is due whenever the lender requests repayment.

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− Constant Or Reducing Loan: The term loan is a constant or reducing loan that cannot increase without an amendment or special terms. Once repaid, any portion of the funds drawn down from it cannot be reborrowed.

− Single Funding Or Several Draws: A term loan may provide for single funding or for several draws that may depend on the passage of time or the occurrence of certain events. The latter is referred to as an “advancing term loan.”

− Single Payment Or Amortization: A term loan may provide for a single payment at the expiration of the term or for any schedule of amortization, either with or without a balloon payment at the end of the term.

* Revolving Credit: A revolving line of credit allows the borrower to make loans during a specified period of time called the “commitment period.” The amount of the commitment may be borrowed, repaid and reborrowed during the period unless the amount of the commitment is permanently reduced. When the commitment period is over, the loan agreement may provide that the borrower has the alternatives either to convert the then-outstanding loans into a term loan or repay the loans in full. Since the borrower typically pays a commitment availability fee on any amount which is available under the commitment but not borrowed, the borrower may wish to permanently reduce the commitment if it does not anticipate the need to reborrow.

− Notice Of Borrowing: Generally, under a revolving credit agreement, the borrower will be required to give the lender a certain amount of advance, written notice when making a request to borrow under the agreement.

Amounts And Dates Requested: The notice of borrowing must include the amount desired and date of each request. The notice of borrowing is effective on its receipt by the lender. Funding usually must occur within three business days. Generally, on the lender’s approval of a request for an advance, the lender will credit the amount of the advance to the general deposit account of the borrower with the lender in immediately available funds.

Certification: The notice of borrowing typically contains a certification to the lender that the borrower’s officer or officers are authorized to request advances, that the

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borrower is in compliance with all covenants and that no event of default exists under the loan documents.

* Letter Of Credit Options: Often a revolving credit loan will allow the borrower to request that letters of credit be issued as long as the aggregate amount of all letters of credit outstanding when added to the amount outstanding under the revolver do not exceed the revolving credit line or a lesser “letter of credit commitment” amount.

● Discretionary Loan: Discretionary loans allow the lender to retain the absolute right to refuse to make any particular advance, even if the borrower is in complete compliance with the terms of the loan documents. Discretionary loans are repayable on demand at any time.

BY LENDER: ● Loans may be classified by the type of lender.

● Single Lender: A single lender loan is one in which funding is made entirely by one lending institution.

● Multibank: A multibank loan is one in which funding is made by two or more lending institutions. It may also be referred to as an “agented” or “syndicated” credit. Multibank loans are typically used where the funds needed by the borrower are beyond the lending limits of the lender that is initially approached. In this case, a number of financial institutions will be required to fund the loan pursuant to an agented credit agreement.

IV. TERM SHEETS

BASIC TERMS: ● While the specific terms of a loan will be dictated by the circumstances of the parties, the following matters are commonly included in term sheets.

Borrower(s): The term sheet should designate the borrowing person or business entity. Each direct borrower, and its status as corporation, partnership, limited partnership, etc. should be named.

Loan Amount: This amount is the “principal” of the loan. It is the exact amount, in dollars and cents, that the lender is offering to lend to the applicant. If more than one disbursement of loan proceeds is allowed under the loan agreement, such as a revolving line of credit, then a maximum loan amount should be stated. If the loan will have

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an option for letters of credit, the maximum amount available for the issuance of letters of credit should be stated.

Funding Terms: The funding terms of the loan should be included in the term sheet, such as whether the loan is a revolving credit, amortizing, on a demand basis or the like.

Interest Rate: The interest rate is the percentage the lender is offering to charge the applicant on any unpaid loan balance.

Repayment Terms: This section will state the frequency and amount of payments due prior to maturity.

Term Of Loan: The maturity or term of loan is the date by which the loan must be repaid in full.

Loan Fees: If the lender requires any additional charges, such as an origination fee, a facility fee, a commitment fee, and a document preparation fee, a description and the exact amount of the fees should be stated.

Guarantors: Guarantors are any other persons or entities that the lender requires to also be obligated to repay the loan amount, and should be listed in the commitment. The term sheet should state any limitation on the guarantor’s liability.

Collateral: The collateral for the loan includes any property that the lender requires to be pledged to secure the loan. The term sheet may also include how much value the collateral is required to have and how the collateral’s value will be determined. The security must be specifically described in the term sheet.

Satisfactory Loan Documentation: Finally, the letter of intent will have a “catchall” provision which will make the loan contingent on satisfactory loan documentation, which documentation can contain any representation, warranty, covenant, event of default or other provision required by the lender.

DETAILED TERMS: ● Although a letter of intent is not contractually binding, it is often in the best interest of both the borrower and the lender to make the term sheet as specific as possible. Both parties will invest a significant amount of time and money in preparing and negotiating the loan documents. Counsel for both the borrower and lender can avoid much controversy by identifying the important issues and addressing them in the term sheet stage. For this reason lenders on large commercial loans will often provide borrowers with very detailed

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term sheets in which the following matters may be addressed.

Representations And Warranties: Representations and warranties are factual statements made by the borrower to be relied on by the lender. They include statements about the borrower’s business structure, financial condition and title to assets. They are included in a loan agreement in order to reflect in writing the bases upon which the lender made the loan. A term sheet may provide for “usual and customary representations and warranties for financings of this type, including, but not limited to the following,” followed by a list of specific representations and warranties.

Financial Covenants: If any financial tests or reporting requirements will need to be met, the term sheet may include a general description of those tests or requirements.

Other Covenants: In addition to the financial covenants, the term sheet may provide for “usual and customary affirmative and negative covenants for financings of this type, including, but not limited to the following,” followed by a list of specific covenants.

Opinion Of Borrower’s Counsel: If the attorney representing the borrower is required to provide a legal opinion it should be stated.

Conditions To Closing: Examples of typical conditions to the lender’s obligation to fund the loan might be the lender’s approval of an environmental assessment of the property, tenant estoppel certificates, and the condition of title to the property in loans involving real estate; the lender’s satisfaction there have been no material, adverse changes in the borrower’s financial condition between the time of the borrower’s loan application and the loan closing; and the lender’s satisfaction there have been no material, adverse changes in the property’s income stream between the time of the borrower’s application and the loan closing.

Events Of Default: The term sheet may also list the events which will cause the loan to go into default.

Governing Law: The term sheet may specify the state whose law will govern the loan documents.

Expiration And/Or Withdrawal Date: The term sheet may set forth a date when the offer will automatically expire or be withdrawn, whether or not the applicant has accepted it.

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COMMITMENT LETTERS:

● What is commonly referred to as “term sheet” can either be a letter of intent or a loan commitment depending upon how it is drafted. A commitment letter is considered an agreement to loan money and is legally binding when the material terms of the contract are agreed upon. The material terms generally are: the amount to be loaned, maturity date of the loan, the interest rate, and the repayment terms. A loan commitment is legally binding on the lender. If the conditions are met the lender is required to fund. In this regard the loan officer must be careful not to orally modify or waive conditions in the loan commitment.

Drafting: The loan commitment must be carefully drafted by the lender and reviewed by the applicant because, once accepted, it is a binding contract. In fact, because borrowers do not want to be surprised by loan documents containing terms and conditions they did not contemplate, borrower’s counsel should, if possible, obtain and review the lender’s proposed form loan documents before the borrower executes the commitment letter (or more importantly pays the commitment fee!). This step will position the borrower to either negotiate the loan documents before executing the commitment or at least determine whether there will be substantial issues over the terms of the loan documentation. A lender may be liable for breach of contract to lend money where it has imposed additional conditions not set forth in the commitment and then failed to make a loan based on the borrower’s failure to fulfill those undocumented conditions.

Conditions To Funding: Loan commitments describe various conditions that the borrower must satisfy before the lender is obligated to make the loan. Thus, even after issuance of a commitment, the borrower still needs to submit (and the lender still needs to approve) various information and documents. The commitment typically provides that the lender’s approval of such information and documents may be given or withheld in the lender’s sole and absolute discretion.

A satisfaction clause will set standards for determining whether the conditions have been satisfied. Commitment letters frequently provide that the specified conditions are subject to the “lender’s satisfaction, in the lender’s sole and absolute discretion.” These so-called “satisfaction clauses” are fraught with the potential for dispute, and can lead to litigation over whether their terms have been met.

Commitment Acceptance: Some (but not all) commitments are conditioned on the borrower’s “acceptance.” The borrower accepts

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the commitment by executing the commitment agreement and the commitment is then held open for its stated term.

Commitment Fees: In commercial loan transactions, the lender often requires that a fee be paid as a condition to the borrower’s acceptance of the commitment. The commitment fee is distinct from the loan fee, but the lender often permits the commitment fee to be applied to various loan fees and costs when the loan is closed. In any event, the commitment fee is nonrefundable, i.e., if the loan does not close, the lender retains the fee. A commitment fee serves a threefold purpose:

− It covers the lender’s administrative and processing costs incurred in connection with the loan.

− It compensates the lender for reserving the loan amount (and refraining from loaning that amount to other prospective borrowers) during the term of the loan commitment.

− It motivates the borrower to close the loan as and when required by the commitment.

LETTERS OF INTENT:

● A letter of intent is a correspondence in which the lender demonstrates a willingness to consider the financing and suggests that further investigation of the borrower’s financial condition be done. A letter of intent is not an offer; it is merely the lender expressing an interest in possibly doing business with the applicant. No acceptance is required since a letter of intent cannot be a binding contract and cannot be enforced by either party. A letter of intent is useful if the lender does not want to make an offer but wants to continue negotiation with the applicant. The letter of intent should be clearly and conspicuously marked as such.

V. LOAN AGREEMENTS

GENERAL: ● A loan agreement is a contract between the borrower and the Bank which sets forth the terms of the lending relationship. Many loans do not require loan agreements. Loan agreements are often used for loans involving revolving lines of credit or letters of credit and are referred to as “credit agreements” rather than loan agreements.

● Loan agreements are signed by both the Bank and the borrower(s). In some instances a letter of intent or term sheet is executed prior to the execution of the loan agreement and/or the loan documents

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pursuant to which the Bank agrees to work with the borrower to negotiate a loan agreement and/or other loan documents which are acceptable to the Bank. It is not intended to be a binding commitment or contract, and a letter of intent or term sheet should expressly provide that it is not intended to bind the Bank.

BASIC CONTENTS OF COMMERCIAL LOAN AGREEMENT:

● A sample Commercial Loan Agreement is located at the end of this Chapter. A standard loan agreement contains the following sections, each of which will be discussed in more detail below:

∗ Preliminary Statement;

∗ Definitions and Accounting Terms;

∗ Commitments and Terms of Credit;

∗ Conditions of Credit;

∗ Representations and Warranties;

∗ Affirmative Covenants;

∗ Negative Covenants;

∗ Defaults; and

∗ Miscellaneous.

● A multibank Loan Agreement covers a credit facility offered by a group or syndicate of banks. One bank acts for itself as a bank and also as agent for the other banks. It will contain a section on the duties and powers of the agent or lead bank.

● A guaranteed loan may include the guaranty within the loan agreement or in a separate document. The loan agreement may also contain representations, warranties and covenants applicable to the guarantors. A security agreement may also be included in the loan agreement.

PRELIMINARY STATEMENT:

● The preliminary statement identifies the parties, the type of credit (i.e., term and/or revolving), the amount of credit and often the purpose of the credit.

DEFINITIONS AND ACCOUNTING

● This section defines special terms used in the loan agreement. It also adopts generally accepted accounting principles (GAAP) to test the borrower’s compliance with the financial covenants and, if the

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TERMS: borrower’s fiscal year does not end on December 31, it will specify the date of the borrower’s fiscal year end.

COMMITMENTS AND TERMS OF CREDIT:

● This section sets forth the terms of the extension of credit including:

∗ the type of loans (i.e., term or revolving);

∗ the issuance of letters of credit, if applicable;

∗ the interest rate(s);

∗ any fees payable to the Bank;

∗ the payment terms and maturity date;

∗ the procedure under a revolving facility or an advancing term loan for the borrower to request a borrowing or advance including, if applicable, the formula for calculating the borrowing base. A sample Request for Advance is located at the end of this Chapter.

∗ the calculation of the borrowing base, if applicable. Borrowing bases are discussed in Chapter 4. A sample Asset Based Financing Agreement is located at the end of this Chapter. It is used as an addendum to the loan agreement for loans with a borrowing base.

∗ mandatory and optional prepayments;

● In credits where the interest rate is tied to eurodollars, there may also be provisions relating to changes in the law which restrict or prohibit the Bank from making eurodollar loans and allowing the Bank to recover its increased costs or losses relating thereto.

CONDITIONS OF CREDIT:

● This section sets forth all the events which must occur and those documents which must be delivered before the Bank is obligated to disburse any funds or issue any letters of credit. These are referred to as “conditions precedent to borrowing.” For example, they may include delivery of the following executed documents:

∗ loan agreement;

∗ promissory note;

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∗ guaranty agreement;

∗ security agreement;

∗ pledge agreement;

∗ officer’s certificates;

∗ good standing certificates;

∗ schedule of pending litigation against the borrower;

∗ legal opinions;

∗ a borrowing base certificate;

∗ copies of “key” contracts between the borrower and third parties;

∗ evidence of insurance;

∗ landlord lien waivers/subordinations; and

∗ the termination of any UCC-1 financing statement not naming the Bank as the secured party and the filing of UCC-1s naming the Bank as the secured party.

REPRESENTATIONS AND WARRANTIES:

● Representations and warranties are factual statements made by the borrower to be relied on by the Bank. They include statements about the borrower’s business structure (i.e., corporation, partnership, LLC), financial condition and title to assets. They are included in a loan agreement in order to reflect in writing the bases upon which the Bank made the loan.

● A typical loan agreement includes the following representations and warranties:

∗ that the borrower is in proper legal form (i.e., corporation, partnership, LLC) and is in good standing;

∗ that the borrower is authorized to borrow, execute the loan documents and grant the liens;

∗ that the loan documents do not conflict with the borrower’s bylaws, articles of incorporation or contracts;

∗ that no government or other approvals are required;

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∗ that the borrower is not in default under any other contracts;

∗ that the borrower is not in violation of any law;

∗ that the borrower’s financial statements accurately reflect the borrower’s financial position;

∗ that the use of the loan proceeds will be for legal purposes;

∗ that the borrower has paid all taxes;

∗ that the borrower is not in violation of environmental laws;

∗ that the borrower has good title to its property and assets;

∗ that the borrower is in compliance with ERISA.

● Breach of any one of these representations or warranties constitutes an “event of default” under the loan agreement.

COVENANTS: ● Covenants are agreements made by the borrower for the benefit of the Bank as to the future conduct of the borrower’s business. Covenants may, for example, test for financial soundness, require the borrower to maintain its corporate existence or prohibit substantial changes in the nature of the borrower’s business. They are used by a Bank to attempt to assure the continued creditworthiness of the borrower.

AFFIRMATIVE COVENANTS:

● Affirmative Covenants are sometimes divided into “Financial Covenants” and “Nonfinancial Covenants”. If the borrower fails to fulfill one or more of these obligations or “breaches a covenant”, an Event of Default occurs. This allows the Bank to accelerate the maturity date of the loan if there are adverse developments in the business affairs of the borrower.

● A typical loan agreement includes the following affirmative covenants which require the borrower to:

∗ deliver annual, quarterly and/or monthly balance sheets and income statements;

∗ pay all taxes;

∗ comply with all laws;

∗ maintain insurance;

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∗ maintain legal existence and good standing;

∗ allow the Bank to inspect its books and records;

∗ maintain its assets in good working order;

∗ maintain a proper accounting system;

∗ use the proceeds of the loans and letters of credit for proper purposes.

BORROWER SPECIFIC FINANCIAL COVENANTS:

● As previously noted, the affirmative covenants may also include “financial covenants” which require the Borrower to maintain certain financial thresholds. The covenants should be realistically achievable at the time the loan is made. Definitions of “Net Worth,” “EBITDA” (earnings before interest, taxes, depreciation and amortization), “Free Cash Flow,” etc. are key. The financial covenants typically require quarterly calculation and officer’s certificate certifying results.

● Compliance with Debt Equity Ratio is typically calculated as follows:

− Debt (total liabilities) divided by Total Equity.

− Shown as a relationship (i.e. 4 to 1 or 4:1).

− The Debt Equity Ratio shows how much the owners have at risk (Equity) as compared to the creditors (Total Liabilities).

− Depending on the type of business, 4:1 is normally considered good ($2,000,000 of Liabilities compared to $500,000 of Equity) while 5:1 shows weakness.

● Compliance with Debt Service or Debt Coverage Ratio is typically calculated as follows:

− EBITDA divided by Total Principal and Interest Payments.

− EBITDA = Earnings before Interest, Taxes, Depreciation and Amortization.

− Shown as a relationship, i.e. 1.6 to 1 or 1.6:1.

− 1.4:1 and above considered good, 1.2 acceptable, 1.0 and below

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viewed as showing weakness.

● Compliance with Interest Coverage Ratio is typically calculated as follows:

− EBITDA divided by Total Annual Interest Payments

− Similar to Debt Coverage Ratio, indicates a company’s ability to service its debt.

− Above 2.5:1 typically considered good. Below that shows weakness.

● Compliance with a Minimum Net Worth covenant is typically calculated as follows: Tangible Net Worth = stated net worth - (accounts and notes receivable from the borrower’s owners, officers or directors + goodwill + any other intangible assets, such as capitalized expenses) + subordinated debt.

● Working capital is defined as those funds invested in a company’s cash, accounts, inventory, and other current assets, and it is calculated by subtracting current liabilities from current assets. Working capital finances a company’s cash conversion cycle, which is the time required to convert raw materials into finished goods, finished goods into sales, and accounts receivable into cash. A Minimum Working Capital covenant ensures that the borrower exercises prudent balance sheet management and maintains adequate flexibility to meet interim cash needs.

● Compliance with a Current Ratio covenant is typically calculated as follows: Current ratio = (current assets - intangible accounts and notes receivable) / (current liabilities - current portion of subordinated debt)

● Compliance with a Fixed Charge Coverage Ratio is typically calculated as follows: Fixed Change Coverage = (Net earnings before taxes + interest expenses + lease expense) (Interest expense + lease expense)

NEGATIVE COVENANTS:

● Negative covenants are agreements made by the borrower which restrict the borrower’s conduct during the life of the loan. They are also used by a Bank to attempt to assure the continued creditworthiness of the borrower. Noncompliance creates an Event of Default. Typically negative covenants:

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∗ restrict the borrower from incurring additional debt;

∗ restrict the borrower from guarantying the debt of others;

∗ prohibit the borrower from creating or allowing additional liens on its assets;

∗ restrict the sale of assets outside the ordinary course of business;

∗ prohibit the borrower from merging with or into another entity;

∗ restrict capital expenditures, investments and acquisitions;

∗ restrict the expansion of the borrower into other lines of business.

DEFAULTS: ● This section sets forth the events which can occur which allow the Bank to accelerate the maturity date of the loan and, if the loan includes a revolving credit facility, terminate the Bank’s commitment to make future advances. Events which are commonly “Events of Default” in a loan agreement include:

∗ failure to pay an installment of principal or interest on the loan;

∗ failure to perform covenants, particularly financial covenants;

∗ a representation or warranty proves to be incorrect;

∗ a judgment is entered against the borrower;

∗ a judgment against the borrower is rendered;

∗ failure to pay indebtedness other than the loan;

∗ a bankruptcy petition (voluntary or involuntary) is filed with respect to the borrower;

∗ a trustee, receiver, custodian, liquidator or similar official is appointed for the borrower;

∗ the death or legal incapacity of an individual borrower.

● Often a loan agreement provides than if the borrower fails to pay principal files bankruptcy or becomes a judgment debtor the loan is automatically accelerated. In the event of other defaults loan agreements often provide the borrower with a “grace” or “cure” period (i.e. anywhere from 5 to 30 days) within which to remedy the

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default.

MISCELLANEOUS: ● This is the catch-all section which contains provisions:

∗ allowing or restricting assignments and/or participations of the loan;

∗ setting forth the addresses for notices and the procedure for giving notice;

∗ specifying the state whose law governs the documents and the state where a suit with respect to the loan must be brought;

∗ specifying the parties’ intent to comply with all applicable usury laws (i.e., a usury savings clause);

∗ waiving the borrower’s right to a jury trial;

∗ specifying that the loan agreement and various other documents constitute the final agreement of the parties.

VI. GUARANTIES AND THIRD PARTY PLEDGES OF COLLATERAL

GENERAL: ● A guaranty is an undertaking by one person to answer for the payment of a debt or for the performance of some obligation of another person who is primarily liable for such payment or performance.

REASONS FOR GUARANTIES:

● The primary purpose of a guaranty is to provide support for a loan or other extension of credit to a borrower whose credit is not strong enough or whose collateral is insufficient. In other situations, the Bank may insist on a guaranty from a stockholder or other insider in order to force the guarantor to take a greater interest in seeing to it that the loan is repaid.

KINDS OF GUARANTIES:

● Guaranty of Payment: where the Bank is entitled to recover from the guarantor without first seeking to recover from the borrower. This is the most common (and, from the perspective of the Bank, the best) form of guaranty. To be of this type, the guaranty should contain appropriate language making it clear that it is “a guaranty of payment and not of collectability.”

● Guaranty of Collection: where the Bank may not recover from the guarantor until the Bank has sought (unsuccessfully) to collect from the borrower. In such cases, the guaranty amounts to a remedy of

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last resort. Guaranties are construed in favor of the guarantor against the Bank. Accordingly, in the absence of language to the contrary, a guaranty will be treated as a guaranty of collection. If a guaranty of collection is intended, the guaranty should contain language giving the Bank the right, in its sole discretion, to determine if and when it has exhausted its remedies with respect to the borrower and the borrower’s collateral.

CONSUMER GUARANTIES:

● The Federal Trade Commission requires that the Bank give the following notice to a cosigner or guarantor of a consumer debt (16 C.F.C. §444.3):

NOTICE TO COSIGNER

You are being asked to guarantee this debt. Think carefully before you do. If the borrower doesn’t pay the debt, you will have to. Be sure you can afford to pay if you have to, and that you want to accept this responsibility.

You may have to pay up to the full amount of the debt if the borrower does not pay. You may also have to pay late fee or collection costs, which increase this amount.

The creditor can collect this debt from you without first trying to collect from the borrower. The creditor can use the same collection methods against you that can be used against the borrower, such as suing you, etc. If this debt is ever in default, that fact may become part of your credit record.

This notice is not the contract that makes you liable for the debt.

THIRD PARTY PLEDGE OF COLLATERAL:

● In certain instances a third party will be willing to pledge collateral to the Bank to secure the borrower’s obligation but will not guaranty a limited or unlimited amount of debt. This limits the pledgor’s liability and the Bank’s recourse to the value of the collateral. The Commercial Security Agreement form located at the end of Chapter 3, can be used for a third party pledge of collateral.

GUARANTY SUBSTITUTES:

● Sometimes, for a variety of possible reasons, the Bank may not be able to obtain a traditional guaranty. In these situations, it may be possible to obtain another form of undertaking that is not normally thought of as guaranty but nonetheless serves the same general purpose. They include the following:

* Joint and Several Note: where a person (not the borrower) becomes a co-maker of a note as an accommodation to the borrower.

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* Third Party Pledge Agreement: where a person (not the borrower) pledges his assets to secure a loan made to the borrower (see above).

* Indemnity/Surety Agreement: where a person (not the borrower) agrees to indemnify the Bank for losses incurred by the Bank in connection with a loan made to the borrower. This is substantively the same as a guaranty of collection.

* Keep-well Agreement: where a person (not the borrower) agrees, for the benefit of a Bank, to take specific action designed to enable the borrower to repay the loan. Examples include the following:

− Covenant to maintain “solvency” of the borrower so long as the loan remains outstanding.

− Covenant to maintain “financial condition” of the borrower so as to enable the borrower to repay the loan.

− Covenant to make “cash advances” to the borrower to the extent of “cash deficiency” (i.e., excess of (i) amount past due on the loan over and (ii) cash available to the borrower for such purpose from other sources). At option of the covenant obligor, advances can be treated as:

capital contribution;

subscription price for additional shares of capital stock of the borrower;

subordinated loan to the borrower; or

any combination of the above.

− Subscription for additional shares of capital stock of the borrower at price sufficient to enable the borrower to repay the loan.

− Covenant to use “best efforts” to cause the borrower to timely repay the loan.

− Covenant to maintain the borrower’s “net worth” at or above specified amount at all times prior to full repayment of the loan.

− Covenant to “take any action that may be necessary or

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appropriate” to enable the borrower to timely repay the loan.

− Covenant to cause outstanding principal of all subordinated advances/loans made by the covenant obligor to the borrower to be not less than specified amount at any time prior to full repayment of the loan.

− Confirmation of “intention” of covenant obligor to (i) maintain sound financial condition of the borrower and/or (ii) cause the borrower to repay the loan.

Keep-well agreements and other forms of guaranty substitutes are fraught with problems, not the least of which is that they tend to be so vague that they are difficult to enforce. Banks should consult with Bank Counsel before accepting one of these agreements in lieu of a traditional guaranty.

• Non-disposal Agreement: where parent corporation (not the borrower) agrees to maintain specified ownership interest (i.e., 100%) in the borrower until full repayment of the loan. Expected benefit to the Bank is based upon assumption that, as a practical matter, the parent will not allow the subsidiary (i.e., the borrower) to default on the loan. Reasonableness of this assumption depends on various factors, including (i) whether or not the parent is a publicly-held corporation, (ii) reputation and standing of the parent in financial community and (iii) existence of cross-default provisions in the parent’s loan agreements. It is common for Non-disposal Agreements to contain guaranty disclaimers.

• Contingent Purchase Agreement: where a person (not the borrower) agrees, in certain circumstances, to purchase the borrower’s note from the Bank.

• Take-or-Pay Contract: where a person (not the borrower) agrees, in certain circumstances related to the borrower’s debt service capacity, to purchase goods/services from the borrower. Payments to the borrower under the contract sometimes are treated as advance payments for future goods/services.

LIABILITY OF CO-GUARANTORS:

● Where a guaranty is given by multiple co-guarantors, their liability may be unlimited (i.e., joint and several) or limited. Typical limitations include (i) specified dollar amount and (ii) pro rata share (i.e., specified percentage) of the loan. If liability is limited, the guaranty should contain language describing how each co-guarantor’s obligation is reduced as a result of loan payments made by (i) such co-guarantor, (ii) another co-guarantor and (iii) the

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borrower.

For example:

“The Guarantor acknowledges that 50% of the Guaranteed Obligations has also been guaranteed by (the “Other Guarantor”) pursuant to a Guaranty executed by the Other Guarantor pursuant to the Credit Agreement (the “Other Guaranty”), with the intent being that, when this Guaranty and the Other Guaranty are taken together, 100% of all Guaranteed Obligations shall be guaranteed. Accordingly, (x) any payment received pursuant to this Guaranty and applied by the Banks to the Guaranteed Obligations shall be deemed to be applied to the 50% of the Guaranteed Obligations guaranteed by the Guarantor hereunder, (y) any payment received pursuant to the Other Guaranty and applied by the Banks to the Guaranteed Obligations shall be deemed to be applied to the 50% of the Guaranteed Obligations guaranteed pursuant to the Other Guaranty and (z) any payment received from any other source and applied by the Banks to the Guaranteed Obligations shall be deemed to be applied one-half to the 50% of the Guaranteed Obligations guaranteed pursuant to this Guaranty and one-half to the 50% of the Guaranteed Obligations guaranteed pursuant to the Other Guaranty. As a result, it is understood and agreed that, after taking into account the application required by clauses (x) and (y) of the immediately preceding sentence, the Guarantor may, to the extent payments are so applied, be obligated at any given time for less (in the case of a payment applied as described in clause (x) of the preceding sentence without a corresponding receipt and application of payments pursuant to the Other Guaranty) or more (to the extent a payment is applied as described in clause (y) of the immediately preceding sentence without a corresponding receipt and application of payments pursuant to this Guaranty) than 50% of the Guaranteed Obligations.”

● A well-drafted guaranty will give each performing co-guarantor (i) a contractual right to contribution from each non-performing co-guarantor and/or (ii) a contractual right, in lieu of paying off the loan, to purchase the loan from the Bank along with the Bank’s rights and remedies to enforce the guaranty against each non-performing co-guarantor.

SUBORDINATION: ● A well-drafted guaranty will contain language whereby the guarantor (i) subordinates, to the prior payment of the guaranteed loan, all indebtedness (present and future) owing to the guarantor by the borrower and (ii) subordinates any lien or security interest that the guarantor may have or acquire on or in any collateral securing the loan.

AMOUNT OF GUARANTY:

● A well-drafted guaranty will carefully describe the obligations of the borrower for which the guarantor is to be responsible. In most cases, these will include the loan and all other obligations of the borrower under the note and the other loan documents. Some

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attorneys recommend that the guaranteed obligations specifically include interest which accrues on the loan after the filing of any bankruptcy petition with respect to the borrower. As noted below, the definition of guaranteed obligations should expressly include any indebtedness of the borrower arising by reason of disgorged payments.

SBA GUARANTIES: ● Banks, savings and loans, credit unions, and other specialized lenders participate with the Small Business Administration (SBA) to provide small business loans. Lending partners must execute an SBA Form 750, Deferred Participation Agreement, which establishes the terms under which SBA will guarantee a loan submitted by the lender.

● When a Bank applies to the SBA for a guaranty on a proposed loan, it must certify that it will only make the loan if the SBA guarantees it. The SBA then decides whether to guarantee the loan based on the information provided in the loan application.

● If a guaranteed loan defaults, the Bank may request that the SBA purchase the guaranteed portion.

● When a loan is guaranteed by the SBA, certain conditions are imposed on the Bank. Some of these conditions are related to how the Bank must close and administer the account; others are imposed on the borrower, and pertain to the business or its owner(s). The borrower must agree to these requirements as a condition for obtaining the loan. Virtually all SBA loans are secured. In addition to the Bank’s standard loan documentation, the SBA may require amendments to the security or loan documentation. See the Small Business Administration Lien Instruments Addendum located at the end of this Chapter.

● The SBA offers its lending partners a variety of methods for applying for a guaranty on proposed loans. The differences are related to the levels of authority and responsibility the lender and the SBA have in making decisions associated with processing, closing, and administering each loan. Lenders are given authority to take on more of these responsibilities based on their experience and performance with the SBA. The better a Bank has conducted its analysis and performed administrative functions in the past, the more likely the SBA will not have to re-analyze or check these factors in the future. For more information on SBA guarantees, contact the local SBA District Office or go to www.sba.gov

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BANKRUPTCY ISSUES:

● In most instances the Bank may proceed to enforce its guaranty against the guarantor if the borrower files bankruptcy. However, if the borrower files under Chapter 13 of the Bankruptcy Code the “codebtor stay” prohibits the Bank from attempting to collect the consumer debt of the borrower/debtor from an individual co-borrower/debtor (i.e., the guarantor) unless (i) the individual became liable on or secured the debt in the ordinary course of his business or (ii) the case is closed, dismissed or converted to a Chapter 7 or 11 bankruptcy proceeding.

● Corporate bankruptcy issues are discussed in “Upstream Guaranties” and “Cross-Stream Guaranties.”

UPSTREAM GUARANTIES:

● An upstream guaranty occurs when a subsidiary guaranties a loan made to its parent corporation. These guaranties may be unenforceable under creditors’ rights laws relating to fraudulent conveyances. Section 548 of the Bankruptcy Code allows a trustee-in-bankruptcy to avoid a guaranty given one year prior to the filing of the bankruptcy petition if (i) the guarantor did not receive adequate consideration (i.e., “reasonably equivalent value”) and (ii) the giving of the guaranty rendered the guarantor “insolvent” or, in certain other ways, adversely affected the financial condition of the guarantor. State laws (whether the Uniform Fraudulent Conveyance Act or the Uniform Fraudulent Transfer Act) give similar avoidance powers to creditors of the guarantor. Bank counsel should be consulted with respect to the enforceability of upstream guaranties.

● Adequate consideration for this purpose means consideration which benefits the guarantor. Reliance by the Bank will not suffice. An upstream guaranty may or may not benefit the guarantor and, even if it does, the benefit may or may not be adequate to preclude avoidance as a fraudulent conveyance. If it is intended that the parent downstream (whether by loan, advance, capital contribution or otherwise) some of the loan proceeds to the subsidiary, then the subsidiary obviously stands to benefit (albeit indirectly) from the guaranty. In that situation, the issue would turn on the sufficiency of the benefit. Where (i) the subsidiary guaranties the entire amount of the loan to the parent and (ii) it is clear that, at most, only a portion of the loan proceeds will be made available to the subsidiary, a serious question will exist as to the adequacy of the consideration. It may be possible to limit the subsidiary’s obligation under the guaranty and, by so doing, enable the Bank’s counsel to satisfy himself that the guaranty is supported by adequate consideration. For example, the guaranty might limit the subsidiary’s liability under the guaranty to the amount of loan proceeds actually downstreamed

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to it by the parent.

● Because of its complexity, this solvency of the guarantor is significantly more difficult for the Bank and its counsel to assess and, regardless of the level of their comfort, is subject to second-guessing after the fact. Frequently, provisions will be included in the guaranty limiting the liability of the subsidiary under the guaranty in such a way as to minimize the risk that the guaranty will render the subsidiary insolvent.

● If, for one or more reasons, it is not desirable to contractually limit the subsidiary’s obligation under the guaranty, the Bank should obtain appropriate documentary evidence of the facts deemed necessary to satisfy the solvency test. Possibilities include carefully drafted certificates of the chief financial officer of the subsidiary and “solvency letters” from independent financial experts. As a result of a ruling issued by the American Institute of Certified Public Accountants in 1988, accounting firms are precluded from rendering solvency opinions.

CROSS-STREAM GUARANTIES:

● A cross-stream guaranty occurs when one corporation guaranties a loan made to another corporation which is owned by the same parent corporation. These guaranties are subject to the same fraudulent conveyance problems as upstream guaranties. Bank Counsel should be consulted with respect the enforceability of cross-stream guaranties.

DOWNSTREAM GUARANTIES:

● A downstream guaranty occurs when a parent corporation guaranties a loan made to one of its subsidiaries. Generally, these guaranties are not challenged in fraudulent conveyance actions because of the obvious benefit which the guaranty affords to the parent’s investment in the subsidiary.

ATTACKS ON GUARANTIES:

● Ultra Vires: State corporation laws, as well as the guarantor’s charter and bylaws, may deny or restrict the ability of the guarantor to give a guaranty.

● Board of Directors/Shareholder Approval: Similarly, board of director and/or shareholder approval may be required for some guaranties.

● Consideration: Under common law, guaranties (like all other contracts) must be supported by consideration. In most cases, the guaranty is required as a condition to making of the loan. In these cases, the consideration is the reliance of the Bank in making the loan to the borrower. If the guaranty is given after the loan has been

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made, new consideration is necessary. This new consideration can take many forms, including inducement for the Bank to modify the terms or increase the amount of the loan.

● Statute of Frauds: Generally, the so-called Statute of Frauds applies to guaranties. Therefore, oral guaranties are not enforceable.

● Waivers and Consents: A well-drafted guaranty will contain (i) waivers by the guarantor of various notices and defenses otherwise available to the guarantor and (ii) consents by the guarantor to various actions and circumstances which might otherwise release the guarantor or otherwise limit the right of the Bank to enforce the guaranty. Such provisions are intended to make the guarantor’s obligation “absolute and unconditional.”

If, following the giving of a guaranty, the Bank proposes to take or consent to any action with respect to the loan, the borrower or any collateral or other guaranty securing the loan and if the Bank or its counsel is concerned that such action might invalidate the guaranty, the Bank should insist upon the guarantor giving its consent to such action.

● Revocation/Termination: A well-drafted guaranty will contain language making it clear that the guaranty is a continuing guaranty which cannot be revoked by the guarantor. If the guarantor is an individual, the guaranty should provide that it will not terminate upon the death or insanity of the guarantor. If the guaranty is limited in amount, it should provide that the Bank may extend credit to the borrower above that amount and that such extension of credit will not invalidate the guaranty.

DOCUMENTS REQUIRED FOR GUARANTY OF BUSINESS LOAN:

Current Financial Statement of Guarantor.

Authorization Documentation.

Guaranty. See sample forms M-240 and M-250 at the end of this Chapter.

Security Agreement. If the guaranty is secured, consult the chapters in this Guide applicable to the collateral securing the guaranty.

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VII. LOAN CLOSING

CLOSING PROCESS:

● The loan closing is the meeting where all the loan documents are signed. Often, the loan proceeds are disbursed. Prior to the closing, all conditions precedent must be met and any negotiations regarding loan terms completed and stated in the loan agreement.

CLOSING DATE: ● Prior to closing, a mutually agreeable closing date must be established. At this time, all necessary parties must be available to execute the loan documents. Occasionally, a suggested closing date provides particularly short notice, not allowing for a comprehensive review of all necessary documentation. Counsel should be cautious in such a situation, and inquire as to why such a short date is requested. A borrower’s need to take out other loans on or before their maturity may, for example, be a valid reason for needing a short close date.

CLOSING CHECKLIST:

● In order for the closing to go smoothly, adequate preparation is necessary. The preparation of a closing checklist is a helpful tool. A closing checklist should include the following:

* documents to be presented at closing, including all schedules, appendices and exhibits;

* designation of party responsible for preparing each document;

* designation of party or parties to execute each document;

* post-closing documents or requirements, if any.

Both parties, or their counsel, should be given the opportunity to review the closing checklist prior to closing in order to ensure that it is a comprehensive and accurate reflection of what needs to be done at closing. If a party for any reason cannot present a required document, this should be communicated immediately to the other party so the problem can be resolved.

DOCUMENT EXECUTION:

● The loan documents are actually executed at the closing. The parties sign the documents and become contractually obligated under their terms. Documents must be executed by the parties in their appropriate capacity.

Representative Capacity: A signature preceded by the word “By” discloses a representative capacity. Take for example, ABC Corporation by John Smith, President. In this example, ABC Corporation is the principal, John Smith is the signer and his

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representative capacity is President of the corporation.

WIRE TRANSFERS: ● The disbursement of funds is often made by wire transfer especially where loan proceeds are being used in connection with an acquisition. If this is the case, the borrower should give the lender wire transfer instructions, keeping in mind that most wire transfers cannot be made after 3:00 to 4:00 p.m. of a banking day.

PAYOFF LETTERS: ● Loan proceeds are sometimes used to pay off existing loans. If this is the case, the new lender will require that the prior lender issue a payoff letter that states the debt to be repaid including any accrued and unpaid interest and all other expenses calculated to the closing date.

POST-CLOSING DOCUMENTS:

● Where documents cannot be delivered at closing, alternative arrangements must be made.

Delay Closing: If the document that cannot be delivered at closing is a document that is basic to the transaction, such as a guaranty, closing may need to be postponed.

Close With Agreement To Provide Certain Documents After Close: If the document that cannot be delivered at closing does not materially adversely affect a party’s position, the parties can agree to provide the document after closing.

Post-Closing Delivery Letter: The party to provide the document post-closing will be required to execute an agreement requiring the delivery of the missing document by a certain date after closing. The failure to deliver the document by the required time will be considered an event of default.

FORMS: ● The forms referenced in this Chapter appear in the following order:

∗ Commercial Loan Agreement (COMM-AGREE) (3/31/2015) ∗ Asset Based Financing Agreement (COMM-ADD-ABF)

(10/15/2001) ∗ Request for Advance (RFA) (2/7/2007) ∗ Commercial Promissory Note (for use with Commercial Loan

Agreement) (COMM NOTE) (10/30/2009) ∗ Guaranty of commercial debt (by business entity) (Form M-250)

(8/29/2006) ∗ Guaranty of commercial debt (by individual(s)) (Form M-240)

(9/7/2005) ∗ Small Business Administration Lien Instrument Addendum

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(SBA-ADD) (2/1/2011) ∗ Form of Questionnaire and Perfection Certificate

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FORM OF QUESTIONNAIRE AND

PERFECTION CERTIFICATE

The undersigned, [PREPARE SEPARATELY FOR EACH LOAN PARTY] (the “Company”), hereby represents and warrants to [INSERT BANK NAME] (“Bank”), under that certain Revolving Credit and Security Agreement, to be entered into on or about ______________ ,20__ (the “Credit Agreement”), that the information set forth in this perfection certificate is true, accurate and complete.

1. NAMES OF THE COMPANY.

The exact legal name of the COMPANY as it appears in its Articles or Certificate of Incorporation or Formation or equivalent document, including any amendments thereto, is as follows:

_______________________________________________________________________

The state-issued organizational identification number of the COMPANY is as follows [state “none” if the state does not issue such a number]:

_______________________________________________________________________

The federal employer identification number of the COMPANY is as follows:

_______________________________________________________________________

The COMPANY is the following type of organization: _____________________.

a. The COMPANY was formed on [_________], under the laws of [__________] and is in good standing under those laws. The COMPANY has not at any time: (i) changed its state of incorporation or formation or (ii) changed or converted its entity status (e.g., from a limited partnership to a limited liability company), except as follows:

_______________________________________________________________________

b. The following is a list of all other names (including fictitious names, d/b/a’s, trade names or similar appellations) used by the COMPANY or any of its divisions or other unincorporated business units during the past five (5) years:

_______________________________________________________________________

c. The following are the names of all names (including fictitious names, d/b/a’s, trade names or similar appellations) of all entities to which the COMPANY became the successor by merger, consolidation, acquisition, change in form, nature or jurisdiction of organization or otherwise during the past five (5) years:

_______________________________________________________________________

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d. The following are the names and addresses of all entities from whom the COMPANY has acquired any personal property in a transaction not in the ordinary course of business during the past six (6) years, together with the date of such acquisition and the type of personal property acquired (e.g., equipment, inventory, etc.):

Name Street and Mailing Address Date of Acquisition Type of Property

2. NAMES OF SUBSIDIARIES OF THE COMPANY. Complete this section for any subsidiary (whether direct or indirect) of the COMPANY now existing.

a. The exact legal name of each subsidiary of the COMPANY as it appears in its Articles or Certificate of Incorporation or Formation or equivalent document, including any amendments thereto, is as follows:

_______________________________________________________________________

b. The state-issued organizational identification number of each subsidiary of the COMPANY is as follows [state “none” if the state does not issue such a number]:

Name Number

c. The federal employer identification number of each subsidiary of the COMPANY is as follows:

Name Number

d. The following is a list of the jurisdiction and date of incorporation or formation of each subsidiary of the COMPANY:

Name Jurisdiction Date of Incorporation

e. The following is a list of all other names (including fictitious names, d/b/a’s, trade names or similar appellations) used by each subsidiary of the COMPANY during the past five (5) years:

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Name Mailing Address Date of Acquisition Type of Property Subsidiary

f. The following are the names of all names of all entities to which a subsidiary of the COMPANY became the successor by merger, consolidation, acquisition, change in form, nature or jurisdiction or otherwise during the past five (5) years:

Name Subsidiary

g. The following are the names and addresses of all entities from whom each subsidiary of the COMPANY has acquired any personal property in a transaction not in the ordinary course of business during the past six (6) years, together with the date of such acquisition and the type of personal property acquired (e.g., equipment, inventory, etc.):

Name Mailing Address Date of Acquisition Type of Property Subsidiary

3. LOCATIONS OF COMPANY AND ITS SUBSIDIARIES

a. The chief executive offices and principal mailing addresses of the COMPANY and its subsidiaries are located at the following addresses:

Complete Street and Mailing Address, Including County and Zip Code COMPANY/Subsidiary

b. During the past five (5) years, the COMPANY’s chief executive office and the chief executive offices of its subsidiaries have been located at the following additional addresses:

Complete Street and Mailing Address, Including County and Zip Code Dates Used COMPANY/Subsidiary

c. The following are all the locations in the United States of America where the COMPANY and its subsidiaries maintain any books or records relating to any of their

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accounts receivable, contract rights, chattel paper, general intangibles or mobile goods (attach legal descriptions for all locations noted below):


d. The following are all the locations in the United States of America where the COMPANY and its subsidiaries maintain any inventory or equipment (attach legal descriptions for all locations noted below):


e. The following are all the locations in the United States of America where the COMPANY and its subsidiaries own, lease, or occupy any real property (attach legal descriptions for all locations noted below). If the location is owned by the COMPANY or a subsidiary, the chart below lists the name and address of each real estate recording office where a mortgage on such owned real property would be recorded. If the location is leased by the COMPANY or a subsidiary, the chart below lists the name of the landlord and a description of the lease relating to such property.

Complete Street and Mailing Address, including County and Zip Code

COMPANY/ Subsidiary

Owned/ Leased

Real Estate Recording Office Information Landlord

Lease Description

Record Owners and, if owned by the Company or any subsidiary, any mortgagees of the above real property:

______________________________________________________________________________

f. The following are all the locations outside of the United States of America where the COMPANY and its subsidiaries own, lease, or occupy any real property:


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Record Owners of above:

______________________________________________________________________________

g. Prior Locations. Set forth below is the information required by subparagraphs (c) through (f) of Section 3 with respect to each location at which, or other person or entity with which, any of the Collateral has been previously held or any place of business previously maintained by the COMPANY or any of its subsidiaries, in each case, at any time during the past twelve (12) months:

______________________________________________________________________________

h. The following are the names and addresses of all consignees and lessees of the COMPANY and its subsidiaries:

Name Complete Street and Mailing Address, Including County and Zip Code COMPANY/Subsidiary

i The following are the names and property addresses of all warehousemen, bailees, purchasers of chattel paper and all other third parties who have possession of any of the COMPANY’s property or the property of its subsidiaries:

Name Complete Street and Mailing Address, Including County and Zip Code COMPANY/Subsidiary

j. The following are any locations in the United States of America at which the COMPANY and its subsidiaries do business in addition to locations listed above:


k. The following are any locations outside of the United States of America at which the COMPANY and its subsidiaries do business in addition to locations listed above:


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l. The following are the States of the United States of America in which the COMPANY and its subsidiaries transact business:

State(s) COMPANY/Subsidiary

m. The following are the States of the United States of America in which the COMPANY and its subsidiaries are duly qualified and in good standing to transact business as a foreign corporation/entity:

State(s) COMPANY/Subsidiary

n. The following are countries or territories outside of the United States of America in which the COMPANY and its subsidiaries are duly qualified and in good standing to transact business as a foreign corporation/entity:

Country/Territory COMPANY/Subsidiary

o. Below is the information required by UCC §9-502(b) or former §9-402(5) of each state in which any of the Collateral consisting of fixtures are or are to be located and the name and address of each real estate recording office where a mortgage on the real estate on which such fixtures are or are to be located would be recorded:

Real Property to Which the Collateral is Related Lessor

Real Estate Recording Office

Fixtures COMPANY/Subsidiary

4. GOVERNING DOCUMENTS

a. The COMPANY’s and each subsidiary’s Articles or Certification of Incorporation or Formation, By-Laws or Operating Agreement, COMPANY or any subsidiary minutes, and other governing documents are available and complete at the following address(es):

______________________________________________________________________________

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b. There is no provision in the Articles or Certificates of Incorporation or Formation, By-Laws, Operating Agreement, Partnership Agreement or other governing documents of the COMPANY, or in the laws of the state of its organization, requiring any vote or consent of shareholders, members or other similarly situated individuals, as applicable, to borrow money, obtain financial accommodations or mortgage, pledge, or create a security interest in any asset of the COMPANY or any subsidiary. Such power is vested exclusively in its managers, managing members, officers and directors, as applicable:

YES _____ NO _____

If “NO”, please explain.

5. SPECIAL TYPES OF COLLATERAL

a. The following are all of the trademarks, trademark applications, trade names and service marks of the COMPANY and its subsidiaries (including any service marks, collective marks and certification marks), together with the trademark numbers and dates of registration with the U.S. Patent and Trademark Office, if applicable:

Trademark Number Date

If Foreign Trademark, What Country? COMPANY/Subsidiary

b. The following are all of the patents or patent applications of the COMPANY and its subsidiaries, together with the patent numbers, names of inventors and dates of registration with the U.S. Patent and Trademark Office, if applicable:

Patent Name Number Date Inventor

If Foreign Trademark, What Country?

COMPANY/ Subsidiary

c. The following are all of the copyrights or copyright applications of the COMPANY and its subsidiaries, together with the copyright numbers and dates of registration with the U.S. Copyright Office, if applicable:

Copyright Number Date

If Foreign Trademark, What Country? COMPANY/Subsidiary

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d. The following are all licenses or similar agreements to use trademarks (including any service marks, collective marks and certification marks), patents, and copyrights of others of the COMPANY and its subsidiaries:

Description of License Agreement COMPANY/Subsidiary

e. The following are all governmental permits and/or licenses held by the COMPANY and/or its subsidiaries:

Description of License Agreement COMPANY/Subsidiary

f. Schedule A attached hereto sets forth a complete list of all deposit accounts, brokerage accounts, commodity accounts, securities accounts and similar accounts including type of account, account numbers, where the accounts are maintained, name of intermediary (if applicable), how title in such accounts is held.

g. Schedule B attached hereto sets forth a complete list of all motor vehicles, trailers and other equipment subject to a certificate of title statute owned by the COMPANY and its subsidiaries (describe each by make, model, year and vehicle/equipment identification number and indicate for each the state in which registered and the state in which based) [with a fair market value in excess of [$__________]] as well as the owner of such property.

h. The COMPANY and its subsidiaries own the following kinds of assets, and attached hereto is a schedule describing each such asset owned by the COMPANY or its subsidiaries and identifying by which party such asset is owned:

ASSET TYPE: COMPANY/ Subsidiary

Franchises, marketing agreements or similar agreements:

Yes _____ No _____

Stocks, bonds, commodity contracts or other securities: Yes ___ No _____ Promissory notes, debentures or other instruments or evidence of indebtedness in favor of such person:

Yes ___ No _____

Letter of credit rights (letters of credit issued in favor of Company or a subsidiary):

Yes ___ No _____

Leases of equipment, security agreements naming such person as secured party, or other chattel paper:

Yes ___ No _____

Aircraft or aircraft engines: Yes ___ No _____ Boats, Ships, Barges or other Vessels: Yes ___ No _____ Railroad Rolling Stock: Yes ___ No _____ Causes of action, claims or countersuits by the Company or its subsidiaries against third parties:

Yes___ No _____

Minerals, wellheads, mineheads: Yes ___ No _____

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ASSET TYPE: COMPANY/ Subsidiary

Timber (including locations in the United States in which COMPANY or a subsidiary possesses timber to be cut):

Yes ___ No _____

Farm products: Yes ___ No _____ Life insurance policies: Yes ___ No _____ Trusts (including trusts for the benefit of officers, employees or others):

Yes ___ No _____

Mortgages, security agreements, guaranties or other security for amounts owed to COMPANY or a subsidiary:

Yes ___ No _____

Any other inventory, equipment or goods subject to certificate of title or other registration statutes of the United States, any state or other jurisdiction:

Yes ___ No _____

i The following is a list and description of all Collateral of the COMPANY and its subsidiaries that would require perfection by means other than the filing of a Uniform Commercial Code financing statement and not otherwise addressed in this Section 5:

_____________________________________________________________________________

6. UNUSUAL TRANSACTIONS OF THE COMPANY AND ITS SUBSIDIARIES

All of the Collateral has been originated by the COMPANY and each of its subsidiaries in the ordinary course of such person’s business or consists of goods which have been acquired by the COMPANY or such subsidiary in the ordinary course from a person in the business of selling goods of that kind, except for the following Collateral which was obtained outside of the ordinary course of business, including, but not limited to, transactions involving bulk transfers:

______________________________________________________________________________

7. CAPITALIZATION OF THE COMPANY AND ITS SUBSIDIARIES

Attached hereto as Schedule C is a true and correct list of all of the issued and outstanding stock and stock equivalents (including, but not limited to, limited liability company interests, membership interests and/or partnership interests) of the COMPANY and each of its subsidiaries and the record and beneficial owners of such stock and stock equivalents (including, but not limited to, limited liability company interests, membership interests and/or partnership interests). Also set forth on Schedule C is each equity investment of the COMPANY and its subsidiaries that represents less than fifty percent (50%) of the equity of the entity in which such investment was made.

8. OTHER

a. The COMPANY and its subsidiaries have never been involved in a bankruptcy, reorganization or assignment for the benefit of creditors except (explain):

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________________________________________________________________________

________________________________________________________________________

________________________________________________________________________

b. At the present time, there are not delinquent taxes owed by the COMPANY and its subsidiaries (including, but not limited to, all payroll taxes, real estate or income taxes) except as follows:

________________________________________________________________________

________________________________________________________________________

________________________________________________________________________

c. There are no tax liens, judgments or lawsuits pending against the COMPANY, its subsidiaries and/or affiliates or any of its managers, managing members, officers or directors except as follows:

________________________________________________________________________

________________________________________________________________________

________________________________________________________________________

d. There are no commercial tort claims with respect to which the COMPANY or its subsidiaries are claimants which arose in the course of the COMPANY’s or its subsidiaries’ business except as follows:

________________________________________________________________________

________________________________________________________________________

________________________________________________________________________

9. ACKNOWLEDGMENT. The undersigned acknowledges that this Perfection Certificate is provided in connection with the Credit Agreement and the other documents and instruments to be executed and delivered in connection therewith (the “Other Documents”) and that Bank will rely upon the information contained herein. The undersigned further acknowledges and agrees that the information contained herein shall be deemed to be a representation and warranty, on behalf of the COMPANY and each subsidiary, under each Other Document, and that any material misstatements or material omissions contained herein may constitute a default under each Other Document.

10. AUTHORIZATION. The Company and each subsidiary hereby irrevocably authorizes Bank (collectively, the “Secured Party”) or the Secured Party’s agents, at any time (including, without limitation, any time prior to the execution of any security agreement) and from time to time, to file in any filing office in any jurisdiction any initial financing statements

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and amendments thereto and hereby ratifies its authorization for the Secured Party or its agents to have filed in any jurisdiction any initial financing statements or amendments thereto if filed prior to the date hereof.

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The undersigned undertakes to advise Bank of any change or modification whatsoever with respect to any of the foregoing matters. Until such notice is received by the Bank, Bank shall be entitled to rely upon all of the foregoing and presume they are correct and accurate in all respects.

DATED as of the date first written above.

Company: [INSERT COMPANY NAME]

By: Name: Title:

For the purposes of Paragraph 10:

Subsidiary: [INSERT SUBSIDIARY NAME]

By: Name: Title:

Subsidiary: [INSERT SUBSIDIARY NAME]

By: Name: Title:

A-1

SCHEDULE A

Accounts

B-1

SCHEDULE B

Motor Vehicles

C-1

SCHEDULE C

Stock Ownership and Other Equity Interests