On June 25, 2014, the US Treasury Department, through the Office of the Comptroller of the Currency (“OCC”), issued a press release saying that banks nationwide are making riskier loans to compete with other banks. The OCC is charged with regulating and supervising all national US banks, and this latest comment shows its concern over banks loosening their credit and underwriting standards for all types of loans that include commercial lending.
For some, relaxing loan credit standards to accommodate small business is welcome news, but for those financial and legal professionals still helping business owners clean up from the commercial loan mess after 2008, this federal “notification” comes too soon off the heels of the Great Recession that supposedly ended in 2009.
Small businesses certainly need access to capital, but in preparation for the next financial debacle, here are three precautions business owners should strongly consider when taking a commercial loan:
Never Sign Blank Documents or Sign Without Reading
Sounds simple, right? Numerous business clients come to me with a common bank problem: they failed to read the fine print or quickly signed paperwork that their loan officer pushed, often in a rush in front of them.
Make Copies
Make and keep copies of any loan paperwork that you endorse before it leaves your control.
Get Everything in Writing
If the loan officer makes verbal representations to induce a business to take a loan, the business needs to get any promises in writing. This is especially true with loan renewals, loan extensions, or modifications. Everything that is important to the loan relationship must be documented. Don’t be fooled into signing on terms that you are unhappy with in anticipation that any significant verbal representations will be reduced to writing later. I have news for you: they won’t.
Hire a Legal Professional Before You Sign
Before you sign any loan term sheets, agreements, loan guarantees, renewals, extensions, or modifications. You can’t afford not to have an attorney experienced in commercial lending to review your loan agreements. Who do you think created the loan agreements for your bank? The adage: “An ounce of prevention is worth a pound of cure”, is an understatement regarding ensuring your livelihood.
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