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Business Finance Odds And Ends: Discover The Financial Impact Of Monetary Loan Terms
Do you know the seemingly insignificant loan terms that can critically impact your business finances?
Business loans have ancillary terms and conditions which impact the financial condition of the borrower and provide remedies for the lender. The smart borrower knows where the miscellaneous monetary landmines are buried in the business loan and takes action to limit financial fallout. After all, it's your business and your money. Guard it! Here are some loan terms that you should step carefully around to avoid blowing up your business finances.
Interest rate lock: The key things in a rate lock are knowing when to lock rate and your financial exposure. Lenders may short sell treasuries to hedge their exposure to your early rate lock. Hedging losses occur when bond market rates move lower which increases the lender's cost to close out their short position. Pay attention to your collateral posting requirements because you need a quickly accessible source of cash to meet the lender's margin call.
Ask the lender to allow your participation in any hedging gains. Be aware that you may have unlimited downside risk to hedging losses. Understand the rate lock procedures and consider engaging a derivatives consultant to help with negotiating the rate lock agreement and participating in the rate lock call. He or she will have real-time access to market rates to make sure you are getting an accurate rate lock.
Financial covenants: You might make covenants which are promises to maintain certain financial performance. Build-in enough cushion so that the covenant is not readily tripped. Consider negotiating the ability but not the obligation to repay a portion of the loan principal without penalty if a loan-to-value or debt service coverage covenant is breached. Look for language that claws back to the original borrowing condition if the financial covenant violation is cured. Work closely with your attorney on the legal language regarding loan covenants during document negotiation.
Interim achievement dates and hurdles: This can tie to financial covenants or some operating metric for the collateral. Make a calendar of any dates specified in your loan agreement and closely monitor the related performance indicators to avoid a loan default. Consider reaching out to your lender early if you believe a covenant violation is likely from an approaching hurdle date. You'll have more time to craft a workable solution for all parties and avoid a last minute scramble to fix a covenant breach. Bad news does not age well in the loan world unlike fine wine.
Cash management requirements: Cash management is the control of cash that comes into and goes out of a borrower. Your lender is very concerned about this issue because cash from the loan collateral is its primary source of loan repayment. The bank gets more comfort from having strong legal and business documentation in place with boundaries around your cash flow.
Your cash management business is leverage; use it. Lenders are hungry for fee revenue and your business deposits are a significant source of income. Take a holistic view of your banking business and consolidate your cash management and treasury business with a small group of financial institutions. This gives you more business leverage and can help win better loan terms and bank product pricing.
The cash management agreement will have many term and conditions to control the flow of cash into and out of the borrower. Involve your accounting, finance and legal team in the negotiation of the cash management documents to preserve cash flow flexibility during the loan term.
Distribution restrictions: Some loans restrict cash flow distributions to the owners until certain minimum financial criteria are established. Your lender wants to preserve your capital participation in the deal and any cash distributed to the owners will dilute the borrower's equity at risk. Be aware of unintended consequences from distribution restrictions such as phantom income that must be reported to the owners without a cash distribution to pay the tax bill.
You might need a waiver from your business partners for required distributions in your corporate governance agreement. Consult your tax adviser to understand the impact of distribution restrictions. Be aware of any cash use limitations and keep your business partners informed of the expected date for resuming normal distributions.
The monetary loan landmines can injure your business. Get expert legal, tax and financial assistance during loan documentation. Pay attention to the small details in your business loan to avoid a big surprise later and have the most productive borrowing experience.
Author Resource:-
Michael Shelton is President and CEO of Shelton Business Services which provides executive coaching, management consulting and financial services. Call 602.463.1199, email clientcare@sheltonbusinessservices.com or visit sheltonbusinessservices.com Advancing business ability with our proven executive coaching, objective management consulting and dependable financial services.
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Business loans have ancillary terms and conditions which govern the actions of the borrower and provide remedies for the lender. The smart borrower knows where the miscellaneous landmines are buried in the business loan and takes action to limit lender interference in daily operations.
Business loans have ancillary terms and conditions which impact the financial condition of the borrower and provide remedies for the lender. The smart borrower knows where the miscellaneous monetary landmines are buried in the business loan and takes action to limit financial fallout. Here are some loan terms that you should step carefully around to avoid blowing up your business finances.
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