The Proactive Solutions Blog

Review of Bank Loan Agreements

Posted by James F. Weber on 08.25.16

When reviewing and evaluating your bank loans make sure that you, your controller, CPA or attorney review all loan documentation in detail and consider the following matters:

Ask for a copy of the documents at least 24-48 hours before closing for review. Banks are known for delivering documents on the same day as the signing date or renewal date.

You, the president of the company, should read all loan documents in their entirety before you sign.

Have your professional advisors read all loan documents (lawyer, CPA).

Have your controller read all loan documents.

Be aware of renewal dates:

  • Make sure the renewal period is for a period of not less than 12 months.
  • Make sure that the renewal date coincides with a realistic expected delivery date of your financial statements.

 

Make sure you know of and approve all (redline) changes from the last loan agreement.

Be mindful of “lender fatigue.” Sometimes the bank just doesn’t want you or your industry as a client anymore. You have been through too much together. It’s time for a change, for the both of you.

Review and evaluate all restrictive and negative covenants:

This should be done before loan closing to make sure there are no changes.

  • Make sure the covenant testing is to be performed annually, not monthly or quarterly.  
  • Stress test your company’s projected worst case performance to the covenants for the coming months, quarter or year.  If you cannot meet the covenants, be prepared; brace yourself for additional fees, additional bank negotiations and restrictions or relationship termination. 
  • Be aware that you will be (should be) required to obtain a bank waiver if you are not in compliance (there is generally a bank fee for this).  If a formal waiver is not obtained the note is cancellable.


Review all business ratios, including but not limited to the current ratio, debt to equity ratio, and cash flow coverage ratio. Look for bank authorized adjustments to net income for extraordinary items (i.e., deferred compensation and subordinated debt) and ask for add-backs or restatements to your benefit for extraordinary or unusual expense items. Also be prepared to discuss Cap Ex (fixed asset purchases) as it relates to your cash flow, covenants, etc. What are your projected Cap Ex needs and are they realistic? Distributions from an S corp will also have an effect. Make sure they are properly considered.

Your banker prepares a credit analysis of your company using a software program. This software spreads your financial data over three years looking at the balance sheet, income statement, cash flow, EBITDA, ratios, trends and working capital and will compare your data to your peers using the NAICS code to determine applicable industry averages. Ask your banker for a copy of this report, review it and understand what the bankers are looking at and for.

Review dividend or distribution restrictions.

  • The bank should allow for tax distributions up to the maximum Federal, State and Local statutory tax rates in effect.

Review capital spending limitations or restrictions (Cap Ex).

Review officer, stockholder, and debt subordination agreements to the bank.

Review the interest rate charged by the Bank.

  • Is it a fixed or variable rate?
  • Make sure the interest rate is tied to a recognized index and not a bank rate.
  • Libor is commonly used today.  Note:  It may be more variable than a prime rate.
  • Evaluate a prime rate in the near term as it may become lower.
  • The bank will also try to include a minimum rate (not less than) this is to protect themselves (floor).

Look for refinancing penalties, prepayment penalties or termination fees (3, 2, 1).

Avoid cross-collateralization of operating company assets and debt with rental real estate or other related company assets and debt.

Avoid guarantee of your partner’s debt; ask for a pro rata (based on stock ownership) loan guarantee.

Attempt to obtain non-recourse debt for owner occupied real estate with a 50% loan to value.

Evaluate your corporate and personal collateral position:

  • Request a copy of the bank’s prior year calculation of collateral position, recalculate this year.
  • Avoid excess collateral positions with the bank.
  • The bank will discount receivables over 90 days, seek to obtain exception for contract amounts with qualified customers.

For more information on this, please contact us. 

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