Covenants and defaults
A commercial loan agreement does more than set an interest rate and a repayment schedule. It usually includes covenants that require the borrower to maintain financial ratios, deliver reports on time, and seek consent before taking on new debt, selling assets, or changing ownership. Breaking one of these can be an event of default even when every payment has been made. Many loan agreements also contain cross-default clauses, so a problem with one lender can trigger rights under another loan. Understanding which covenants you can realistically meet is part of negotiating the loan contract, not something to discover after a bad quarter.
Guaranties and collateral
Lenders to small and mid-sized businesses commonly ask owners to sign a personal guaranty, which can put personal assets within reach if the business cannot pay. The scope of that guaranty, whether unlimited, capped, or limited to certain conduct, is often negotiable before closing and much harder to change afterward. Collateral is usually described in a security agreement and made public through a filing, and a broad description can sweep in more of the business than owners expect. If your company has other lenders, or a merchant cash advance provider, check whether the new loan requires priority over them.
When trouble is coming
If you expect to miss a covenant or a payment, it is usually better to talk to counsel before talking to the lender, so that you understand what the agreement allows and what you might be giving up in a waiver or forbearance agreement. Those agreements often ask the borrower to acknowledge the debt and release defenses, which can matter later. Gather the loan agreement, every amendment, the guaranties, recent compliance certificates, and correspondence with the lender. In a first meeting we review where you stand under the documents, what the lender can and cannot do, and whether restructuring the loan or refinancing elsewhere is realistic.
