Commercial Loans – The Loan Offer
The recent upturn in the Irish economy will inevitably lead to an increase in commercial lending. Your company may need to borrow to meet working capital requirements and solve cash flow problems. Or, you may need finance for capital expenditure to facilitate growth. This article provides guidance on a key aspect of this process – the letter of loan offer.
First, you will need to decide what kind of finance you require and then discuss your needs with your lender. After you have negotiated arrangements with your lender, a letter of loan offer (otherwise known as a term sheet, facility letter or a letter of sanction) (the “Loan Offer”) will be issued to you setting out the key terms and conditions relating to any finance proposal.
This Loan Offer will usually cover the following matters
- the term of the loan;
- the interest rate of the loan;
- the security required in order to obtain the loan;
- what events, if they occur, will be considered a default by you of your obligations to the lender, for example late payment or insolvency;
- how and when the loan should be repaid;
- covenants and conditions which you will be required to provide to the lender; and
- confirmation that you have the corporate authority in your company to enter into the loan and that you have fully complied with the Companies Acts.
If you wish, you can engage a solicitor at this point to review the Loan Offer prior to signing it. However, if you are satisfied with its terms, you can sign and return it to the lender immediately. It should be noted that this is essentially your contract with the lender and therefore it is a very important document. The Loan Offer will form the basis for all of the other security documentation required for the loan arrangement. You should review the Loan Offer carefully to ensure it reflects the commercial agreement between yourself and the lender. In complex arrangements, it is advisable to get your solicitor on board as early on as possible and preferably, prior to signing.
By signing the Loan Offer, you are agreeing to satisfy any conditions contained within that Loan Offer, in order to obtain the finance. The Loan Offer can set-out conditions precedent and conditions subsequent (if any) to the draw-down of the facilities i.e. what you need to do before the bank will release funds and after funds have been released. Such conditions can include the production of insurance policies, obtaining third party consents, compliance with anti-money laundering requirements and the creation of bank mandates in favour of the lender. A detailed review of the practicality and timing of all the conditions by you at the outset of a matter can ensure that there are no unforeseen delays in the draw-down of funds. It is imperative to identify in advance of signing the Loan Offer whether any of the conditions cannot be satisfied. Typically, the draw-down of funds is dependent on all conditions being satisfied.
Once signed, you will need to engage a solicitor (if you have not already) to move the process forward. You will need to notify you lending institution of your solicitor’s details and the security documentation will then issue directly to your solicitor. Your solicitor will review the Loan Offer and associated security documentation and can provide you with advice in relation to the legal impact of each document on you, your property and your business. We will be considering the security documentation in greater detail in the next article in this series on Commercial Loans.
Angela Cleary and Orla O’Connell
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Disclaimer: This document is for information purposes only and does not purport to represent legal advice. If you have any queries or would like further information relating to any of the above matters, please refer to the contacts above or your usual contact in Orpen Franks.
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