There are numerous matters which arise in negotiating a commercial loan or credit facility with one of the main institutional Canadian lenders. The memorandum below will provide a general framework of the process and raise some of the more common issues to be considered by a corporate borrower and its principal directors. There will of course be many circumstances where some comments may not apply. Other situations will raise issues which have not been addressed below.
In approaching a bank, the borrower will want to address a few key issues including the identity, background, and experience of the principals managing the business, the past and prospective viability of the business, the cash flow generated by the company’s current business activities, the availability of tangible assets (real estate, equipment, machinery) as security for any loan, as well as a range of other factors.
Generally, a corporation will prepare a business plan complete with both past financial statements and pro forma financial statements prepared by its accountants, and provide the same to various banks for consideration. This business plan should have appropriate proprietary notices indicating the confidentiality of the information contained therein and limiting the disclosure or use of such information by any recipient. Each copy should be marked and a log should be maintained indicating the name of each recipient who receives a copy of the business plan, the copy number, the date of delivery, and the name of the individual recipient.
It is worth noting that within the scope of any bank’s internal guidelines and lending requirements, bank managers have some discretion in the making of loans. Different branches have different mandates. Some branches focus on small business lending while others may elect to focus on large corporate clients whereas yet others may elect to cater to a certain niche, such as servicing seniors with estate, investment, trust, and financial management services; or perhaps, medical professionals. If your company is pleased with its current bank branch, appropriate inquiries should be made. If your existing bank branch is not focused on your needs, try to obtain a suitable referral to another bank branch. To the extent that your current manager may be able to vouch for you, you may save time.
The key document in the entire bank loan process is a document usually referred to as a Commitment Letter. It will set out the fundamental terms relating to the monies the bank is prepared to advance or facilities it will make available, and the terms and conditions for so doing. This agreement is typically prepared by the bank’s senior loan officer, sometimes in conjunction with the bank’s lawyer (depending on the dollar amount in question). As with any commercial document, the terms of the Commitment Letter will reflect the bank’s interest, including obtaining as much collateral security for the loan as may be available.
The Commitment Letter is generally structured as a binding agreement with various conditions. It is the road map for the subsequent, formal loan security documentation which will be prepared by the bank’s lawyers. Try to resist the temptation to negotiate the Commitment Letter on your own, and make sure you have your lawyer and accountant involved closely in its review. Also remember that if a given assurance or other matter is not in writing, from a practical perspective, you may consider it as not having been made in the first instance. Put plainly, if a promise or assurance made to you by the bank is not in writing, it’s not worth anything. If the bank is providing you with any promise or assurance which you consider important, get it in writing in the Commitment Letter.
If you do sign the Commitment Letter without first getting appropriate legal or accounting advice, you will usually (depending on the specific wording in the document) have entered into a binding agreement. Your lawyer’s ability to negotiate or otherwise advise you effectively after this point will be limited in scope, largely confined to the effect of what you have agreed to be bound by, as stipulated in the terms of the Commitment Letter.
Further details can be found in the following attachment Memo to Clients-Bank borrowing Dec 0815
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