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Before You Sign that Loan Agreement… Why You Need to Call in to See Your Lawyer on Your Way to the Bank
By Christopher J Sherliker

When it comes to asking your bank for support, many businesses only think of consulting their lawyers once they've already negotiated the principal terms with the bank and are looking to "tidy up the loose ends". Yet seeking advice "too little, too late" can cost you dearly. Jonathan Silverman sets out the value of speaking to your solicitors before negotiating a business loan.

A good, experienced commercial lawyer will have a genuine understanding of a wide range of businesses, including your own, and by seeking their advice before striking a deal with your bank, you may be able to secure far better terms.

Of course this means keeping a dialogue going with your lawyer through good times as well as bad, and sharing your needs and aspirations, so that even when you are in a relatively weak position you can approach your bank in a constructive and positive manner. In this way, you can aim to secure the level of funding you really need and, crucially, not give unnecessary security or collateral.

Almost inevitably, the bank will be looking to shore up its position with an existing customer seeking further funds, even though the existing cover should be adequate for the increased facility. The cynical will simply say that a bank manager's principal objective in life is to secure his own pension rather than to authorise potentially risky lending, and this is, perhaps, especially true in the current climate.

Whilst many businesses may turn to their accountants before approaching their banks to make sure that their financial data is properly presented, there is a good argument that they should also be talking to their lawyers. This will ensure that the case is properly presented and that the client understands exactly what the bank is going to ask for by way of collateral before they meet, so that, wherever possible, the banks unreasonable demands can be deflected at the earliest possible opportunity. Otherwise, the danger is that you may innocently concede a point which you should be resisting.

Many of our clients benefit from talking to us and gaining a greater understanding of the implications of the enforcement of personal guarantees, charges, debentures, charges over book debts, factoring, cross guarantees or collateral requirements before they talk to their bank.

There can also be occasions when you may benefit more from putting a fresh banking proposition to new lenders introduced by your solicitors rather than simply going back to your existing bank. This is especially true if the relationship with your bank has soured over a period of time and perhaps, unreasonably, the lender has a jaundiced view of your business.

Whilst I am not suggesting that your lawyer should in any way "gild the lily" when guiding a client in making a bank presentation, we can look at the matter objectively and analytically. We can also articulate the business argument as to why additional funding should be made available and, perhaps, why the new bank should be comfortable with the existing level of security rather than demanding more.

You need to have a clear understanding about the possible impact of giving unlimited personal guarantees, especially when they are supported by charges over your home (the bank will no doubt require either a waiver from your spouse or a supporting collateral guarantee). The problem is, inevitably, that once that particular card has been played, it cannot be used again. Far better to use your lawyers in order to negotiate that the bank take (if they must) a fixed charge for specified sum of money rather than give them an all monies charge.

Where the personal guarantee of more than one person is involved, it is even more important to negotiate that the guarantees should be several rather than joint and several. Moreover, do not forget that there should be a written agreement between the guarantors regulating their arrangements inter se if the bank chooses to call only on one of the guarantors.

While the banks’ previous enthusiasm to sell life insurance to support any borrowings may have diminished in light of the criticisms of overselling, it may well be that there is an existing life policy which can be charged in order to support borrowings without increasing any existing costs to you.

Moreover, whilst the "obvious" collateral sought by a bank may well be a debenture over the company's assets and/or personal guarantees from the directors, there may be other options with are worthy of consideration. Far fetched though it sounds, it may well be preferable to offer a charge over an endowment policy, any investment property or even a work of art or a classic car rather than risk the consequences of the creation of a debenture. Debentures are so widely drawn these days that it does not take much in way of a loss of confidence on the side of the bank to trigger the appointment of an administrator or receiver, with the inevitable dire consequences of losing control over the cash generating business.

The key is to aim to strike the best possible deal for your current needs, while retaining, wherever possible, your further opportunities to raise funds as and when they may be required.

In short, a timely meeting with your lawyer before the first meeting with your bank could well pay long-term dividends.

Added: 1st June 2011

Christopher J Sherliker is a partner for Silverman Sherliker LLP who provide legal solutions across a spectrum of requirements.  Find out more about Silverman Sherliker LLP.

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