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Loan documents are an essential part of the commercial loan process. To protect the bank, it is critical that lenders understand the concepts and terms involved.
CURE PERIOD, MATERIAL adverse change, representations, and warranties are common loan documentation terms that can make bankers sound like a cross between a pork producer, a lawyer, and a TV salesman. On the surface, commercial loan documentation can appear complicated, confusing, and intimidating. However, if you stick to the basics, documentation can be straightforward and easy to understand.
The Basics
Loan documents are a contract between the commercial borrower and the bank.
This contract defines:
* The responsibilities of the borrower.
* The bank's rights to repayment of the loan.
Full repayment of the loan is the primary responsibility of the borrower and the primary right of the bank. The borrower uses the loan proceeds to enhance operations that it hopes will lead to increased profits. The borrower's upside profit potential is unlimited. However, the bank's profit is limited to the stated interest and fees. In return for the profit potential, the borrower is expected to repay the full amount of principal, interest, and fees regardless of the success or failure of the business.
Following are the basic commercial loan documents and the key purpose and highlights of each.
Promissory Note
The promissory note is the most basic loan document. The note "evidences the indebtedness of the borrower." In more simple terms, by executing the note, the customer acknowledges borrowing money from the bank and promises to repay the borrowed amount plus interest. The note defines the most basic terms of the loan, including:
* Loan amount.
* Interest rate.
* Repayment terms.
The note also addresses default. A default event occurs when the borrower fails to comply with one or more terms or conditions of the loan. The most basic act of default is payment default. Typically, if a borrower does not make a loan payment when due, the borrower has defaulted in payment. Some banks may give the borrower a 15- or 30-day grace period to make the payment before default occurs. But if a default occurs, the bank has the right to "call the loan" (or "accelerate the loan"), which means that full repayment...