We represent banks, insurance companies and other financial institutions, as well as borrowers and guarantors.
We assist the above types of clients with their commercial and personal loan negotiation and documentation needs, as well as assisting them in their workout, collection and foreclosure matters.
Generally, the process begins with submitting a loan request to your banker or other lender. A loan officer or a loan committee of the bank or lender then evaluates your request and determines whether to approve it. During this time, the prospective borrower may try to negotiate more favorable loan terms. A lender may document its approval by issuing a formal commitment letter, which identifies the key terms of the loan. Once approved, the bank or lender prepares the loan documents in conformance with the approval. Especially on larger transactions, these loan documents are reviewed and further negotiated by counsel for the bank and the borrower until definitive documents are executed. See the flowchart in the Interactive section.
Typically loans are evidenced by one or more promissory notes. For more complex transactions, a comprehensive loan agreement may also be required. If the loan is secured by assets of the borrower, then one or more security agreements may be prepared. If the loan is secured by real estate, then mortgages and assignments of rents are common. If the loan is to be guaranteed by a third party, then a formal guaranty document is often drafted.
The loan agreement generally contains the following components:
- Terms and Conditions of the Loan: a description of the terms and features of the loan such as type, size, interest rate, repayment and maturity.
- Borrower’s Representations and Warranties: factual matters relating to the borrower that the bank is relying on in making the loan.
- Affirmative and Negative Covenants: promises by the borrower to maintain certain aspects of its business operations or to refrain from doing something that would negatively impact its performance or credit quality.
- Conditions Precedent to Loan: a list of the events that must occur before the loan is funded.
- Events of Default: a list of events, such as failure to pay, that entitle the lender to declare the loan in default and exercise remedies.
- Remedies: describes what the lender can do upon the happening of an event of default, such as cease funding, contact borrower’s customers and foreclose its liens on collateral.
- Miscellaneous: sections providing for how notices are given, which law governs, who pays expenses, etc.
A security agreement evidences the borrower’s grant of a security interest in certain personal property of the borrower to secure the payment and performance of the loan from the lender. A security interest is an interest in personal property or fixtures which secures payment or performance of an obligation.
In Illinois, among other possible state and federal laws, secured transactions are governed by Article 9 of the Illinois Uniform Commercial Code (“UCC”), 810 ILCS 5/9-101 et seq.
The following three conditions must be satisfied before an enforceable security interest attaches to the borrower’s property and the property becomes collateral for the loan:
- The borrower must own or have sufficient rights in the collateral being pledged.
- Except for particular types of property, the borrower must “authenticate” (i.e., manually sign) a security agreement. Prudent lenders generally require a security agreement be authenticated by the borrower in all cases where personal property is pledged as collateral.
- The lender must give “value” for the borrower’s pledge or grant of the security interest, such as by loaning money.
Business owners are frequently required to personally guarantee the payment and performance by the business of its loan. A guarantor is expected to comply with the terms and conditions of whatever guaranty he or she signed. Typically, a lender will look to the guarantor for payment if the business defaults. The guaranty may provide for the guarantor to guarantee a specific loan or any and all debt owed by the business to the lender.
A guaranty may be limited as to time or amount. For example, the guarantor may only be asked to guarantee the repayment of a portion of the principal amount of the loan plus interest, fees and costs of the lender. This is more favorable for guarantors than unlimited guaranties, which bind the guarantor to repay all amounts due and owing in connection with the loan and/or other indebtedness owed to the lender.