Le Knapp: Tips for Business Loans

Securing financing is often one of the first steps to successfully owning and running a business, as our resident business lawyer has often said. But even savvy borrowers can get trapped in a bad loan situation. A few precautions can help prevent common mistakes.

Get Everything in Writing

All the terms and details of the loan need to be specified in writing. A lender may make oral promises and agreements, however borrowers should rely only upon written documentation. A legal doctrine called “parol evidence rule” disallows any evidence of oral agreements in court if they conflict with the written loan documents.

Be Careful What You Offer as Security

Although there are few specific rules that can be applied universally to actual terms of a loan, one general guideline is: never offer something as security that you cannot live without. Cautious lenders may ask for more security than necessary. All assets pledged as security are at risk of loss should the loan default. Oftentimes lenders ask not only for security from the borrower, but also a guarantee from a corporate officer of the business, perhaps a deed of trust on their property. In such a case, if the loan should default, both the borrower and the guarantor are at risk of losing their collateral because the terms of the loan legally allow foreclosure.

Understand the Loan Agreement Before Signing

Legal doctrines intended to prevent fraudulent lending can sometimes inhibit the borrower’s legal remedies should something go wrong. Therefore it is imperative to fully understand the agreement before signing it. Lawyers are among the few people besides bankers who can readily sort through and understand the details of a loan. If you have questions about the loan or your rights, find legal counsel. Lawyers can be expensive, but you are hiring an expert who will protect your best interests. The downside of hiring a lawyer is, should there be litigation, the bank may say that because a lawyer examined the documents, they could not have taken advantage of you.

Avoid Signing Releases, Jury Trial Waivers or Arbitration Clauses

Loan agreements often contain a jury trial waiver or an arbitration clause. When agreeing to such terms, know that you are giving up possible significant legal recourses. Similarly, if a lender is worried about a possible claim, they may ask the borrower to sign a liability release. By signing such a release, the borrower forfeits rights to a claim, so it is important that if there is suspicion of improper activity, consult a lawyer about the matter before signing a release.

Take Action if Something Doesn’t Seem Right

Under a legal doctrine called “waiver of fraud,” if a borrower suspects a lender of wrongdoing but continues to receive substantial benefits from the same lender (such as funding from loans) the borrower may lose the ability to later pursue a fraud claim. This doctrine places the borrower in an uncomfortable situation. If you complain to a lender about a questionable practice, you may lose your funding, but to not do so may result in losing your claim. In addition, the statutes of limitation set deadlines for filing claims. If a claim isn’t filed within the proper amount of time, it will be rejected.

Know Your Rights

Basic legal information on borrowers’ rights can be found in libraries and online at Web sites such as ours but perhaps the most important thing is to call a business lawyer at our office with expertise in banking and finance law.

Not every business loan is riddled with problems, but they are not all cakewalks either. Securing a loan that fulfills your business’ financial requirements while retaining your rights can be complicated. Exercising an element of caution and foresight can save headaches later on.

Free Consultation with a Utah Business Lawyer

If you are here, you probably have a business law issue you need help with, call Ascent Law for your free business law consultation (801) 676-5506. We want to help you.