Negotiating Business Loans

Would You Take a Loan That Blocks You from Future Financing? You just secured a $100 million loan to grow your business. Everything looks great. But then, a considerable opportunity appears—a chance to acquire a key competitor. You rush to Bank B for an additional $50 million, confident in your ability to secure financing. Bank B is interested, but there’s a problem. Hidden in your Bank A loan is a clause preventing asset pledging for new loans without their consent. The deal collapses, and another party acquires your competitor. A single clause altered your company's future. 1. What is a Negative Pledge Clause? A Negative Pledge Clause restricts borrowers from using assets as collateral for new loans without the original lender's approval. Signing the loan agreement places a negative lien on all current and future assets without the need to pledge them physically. It safeguards lenders by prioritizing their claims in defaults but restricts borrowers' future financing flexibility. 2. Violating a Negative Pledge Clause by pledging assets without the lender's consent leads to serious repercussions: a) A breach of the clause can lead the lender to demand full loan repayment immediately. b) The lender may legally block the new creditor from enforcing their security. c) The existing lender gains control over financial decisions, possibly leading to unfavorable refinancing terms. Breaking a negative pledge clause can trigger serious financial and legal consequences. 3. Lenders favor negative pledges as they: a) Prevent selective defaults, ensuring borrowers pay all debts, not just new ones. b) Keep lenders first in line if the borrower runs into financial trouble. c) Preserve creditworthiness, making sure assets aren’t over-leveraged. But for borrowers, negative pledges can turn into financial handcuffs. a) They limit flexibility—you might need additional financing but can’t secure it. b) They increase borrowing costs—if lenders can’t take collateral, they charge higher interest. c) They force difficult negotiations—getting lender approval for new financing isn’t always easy. 4. Negative Pledge Clauses Are Evolving As corporate borrowing needs shift, more flexible structures are emerging for borrowers and lenders: a) Existing lenders are ensured equal rights if assets are pledged later. b) Exceptions for Liens – Some agreements permit specific secured debts like small purchase-money loans. c) Companies increasingly use intellectual property, data, and digital assets as collateral, prompting updates to negative pledge terms. Would you accept a loan that limits future borrowing? Negative pledge clauses protect lenders—do they unnecessarily hinder businesses from better financing? Are they essential safeguards or pitfalls for borrowers? Share your thoughts and suggest the next financial term to cover! #NegativePledge #CorporateFinance #DebtCovenants #CreditRisk #PradeepKumarGuptaa

I’ll admit it upfront: I’m a complete term sheet nerd 🤓 I love reading them, building them, negotiating them, and pulling them apart line by line. And yet, year after year, the same thing keeps showing up in my work: too many funders and founders don’t really understand what they’re signing. Term sheets are often treated as a formality or a hurdle to “get through” rather than what they really are: 👉 the blueprint for your future relationship. If we want fairer, healthier investment relationships, both sides need to come to the table informed and confident. That means: Founders actively building their literacy, asking “why is this here?” not just “is this standard?” Funders supporting that process by pointing to good resources, encouraging second opinions, and resisting the urge to hide behind complexity So let’s start with the basics. 📝 What is a term sheet? At its core, a term sheet outlines the key terms and conditions of a potential investment. How much money is going in, what’s being given up in return, and what happens under different future scenarios. It’s not just about valuation. It’s about power, incentives, risk, and alignment. 🪢 Are term sheets legally binding? Generally no, but with important exceptions. While lawyers turn term sheets into full legal agreements, certain clauses are often binding from the outset, including confidentiality, no-shop provisions, and who pays transaction costs. These details matter more than people realise. When I teach this, I like to group term sheets into a few core questions: 💰 What type of funding is this, really? ⏱️ When and how does the money actually arrive? 💵 How much is the company worth and who owns what? 🫰🏻 What does this capital cost me over time? 😀 What happens if things go well? 🙁 What happens if things go badly? 🤝 What rights do funders have along the way? Each of these sections shapes behaviour long after the deal is done. If you want to go deeper, I’ve put together a practical primer called Deciphering Term Sheets, part of the additional resources on Adventure Finance. It walks through the most common terms you’ll encounter and, more importantly, what they mean for your future funding relationship. Because term sheets aren’t just paperwork. They’re the operating system for your partnership. P.S. The Innovative Finance Initiative is about to kick off a design sprint to create an AI tool to hopefully make designing alternative terms sheets much easier!

Argued a matter last month where the girlfriend lent lakhs of rupees to the boyfriend & the boyfriend, now ex, refuses to return the money. Facts were - Rs. 21 lakhs transferred over 3 years. The purpose was to support his business, rent & personal expenses. There was no written agreement, just UPI transfers & a few casual WhatsApp chats Post breakup he claims it was “voluntary” support & not recoverable. This is a scenario we’re seeing more frequently where women are financially supporting partners during relationships with the belief that “trust” will suffice And when the relationship ends, the legal position becomes murky.. From a legal standpoint point here’s what the court looks for - Clear intent to lend, not gift Acknowledgment of debt Communication that reflects expectation of repayment Financial capacity & proportionality Requests / follow ups / reminders showing intent of recovery Here’s what every individual should keep in mind:- Define the transaction clearly state whether it’s a loan, advance / temporary support Keep proof of bank narrations, receipts, screenshots. Even WhatsApp chats count if they show a pattern of borrowing & acknowledgment. Avoid long term financial involvement without basic terms, sometimes even a simple written email confirmation can be invaluable Don’t rely on “mutual understanding” it rarely holds in court. Don’t negotiate informally after a fallout.. initiate formal legal steps. There’s a growing need to de-romanticise financial transactions in personal relationships because if things go south, the law will only protect financial transactions backed by evidence. #recoverysuits #moneymatters #relationships #lawyers #litigation #mediation #arbitration #conflictresolution #romanticrelationships #documentation Adv. Sanil Sarkar - Advocate Bombay High Court

After years on the lending side of the table, one thing still surprises me: Many operators and passive investors focus heavily on returns but not enough on the loan agreement that ultimately governs the deal. Loan documents are not boilerplate. They are the rules of the road. A few areas I consistently see misunderstood or overlooked: - Reporting covenants that can trigger defaults even when a property is cash flowing - Financial covenants like DSCR tests and how often they are measured - Restrictions around distributions, shareholder loans, ownership changes, or new debt - Why lenders strongly dislike surprises and how proactive communication changes outcomes It is important to note that: Lenders are not in the business of foreclosing. They are in the business of getting repaid. Strong borrower behavior, transparency, and structure matter far more than many realize, especially when markets tighten or business plans need adjusting. For passive investors and family offices, this is not just an operator issue. It is a diligence issue. Understanding the credit agreement helps you: - Ask better questions during deal review - Identify hidden risk in capital structures - Evaluate how resilient a deal really is under stress I break this down from a lender’s lens in my latest article (link below). ➡️ If you would like to continue the conversation around passive investing diligence, deal reviews, or stress-testing capital structures, feel free to connect with me here on LinkedIn. Educated investors make better decisions, especially when credit matters most.

Personal guarantees: a topic that's often brushed under the rug. But let’s not kid ourselves; they can make or break your entrepreneurial journey. If you’re an aspiring entrepreneur looking to acquire a business, this is for you. Why should you care about personal guarantees? Here’s why: → You’re on the hook. Signing a personal guarantee means you’re personally liable for the debt. Your house, car, and savings could be at risk. → It impacts your peace of mind. It’s more than just a signature; it’s a constant reminder of the stakes. → Your future purchases are on the line. Defaulting on a loan with a personal guarantee can severely damage your credit. → It’s a test of commitment. Lenders see this as a sign that you’re genuinely committed to making the business work. If you’re not willing to bet on yourself, why should they? But here's what many don’t realize: → Negotiation is key. Don’t just sign on the dotted line. Negotiate the terms and limits of your personal guarantee. Perhaps it burns off after a couple years? → Understand the scope. Is it a limited guarantee? Is it capped at a certain amount? Know what you’re agreeing to. → Covenants are key. These set the rules for the loan and determine when a default is triggered, ultimately putting your PG to the test. Some actionable steps: Do Your Homework: Research the ins and outs of personal guarantees. Knowledge is power. Negotiate Wisely: Don’t be afraid to push back on the terms. It’s your future on the line. Consult Experts: Talk to legal and financial advisors to fully understand the implications. Have a Backup Plan: Know what you'll do if things go south. Always have an exit strategy. Remember, personal guarantees are serious business. Treat them with the weight they deserve. Your entrepreneurial future could depend on it. Have you ever had to sign a personal guarantee? #eta #smb #acquistions 📸 me signing a lease with a personal guarantee. I shouldn’t be smiling. lol

The SBA prohibits loans that finance assets that are held for their passive income. But, there's an exception commonly known as the Eligible Passive Company (“EPC”) rule. An EPC can take any legal form or ownership structure, but must only use loan proceeds to acquire or lease, and/or renovate real or personal property that it leases to an eligible operating company (“OC”) in order for the OC to operate its business. A quick example: Scott, LLC and Oliver, LLC are co-borrowers. Scott, LLC buys a business via asset purchase from Sally, LLC. Oliver, LLC buys commercial real estate from Seller, LLC. Here… Oliver, LLC is the EPC. When structuring an EPC/OC transaction, an EPC may not use loan proceeds to acquire a business, acquire stock in a business or any intangible asset of a business or to refinance debt that was incurred for those purposes. As a passive company, the EPC must lease 100% the subject property directly to the OC. Although the OC is permitted to sublease a portion of the property, it must comply with the governing occupancy requirements of the SBA. So… back to the example: Oliver, LLC must lease the entire commercial real estate property to Scott, LLC via what’s commonly referred to as an “EPC/OC lease.” The lease must be in writing and be subordinated to the SBA’s mortgage, deed of trust, or security interest on the real property. The lease term (including renewals exercisable solely by the OC) must be greater than or equal to the loan term. The rent/lease payments cannot exceed the loan payments, although the lease may additionally require the OC to cover the EPC’s expenses of holding the property. Look… it’s a lease between two parties that are both on the loan. This should be the easiest “lease negotiation” you’ve ever had… The OC must be a co-borrower or guarantor on the loan. If the OC is receiving loan proceeds as working capital and/or for the purchase of other assets, it must be a co-borrower. A final reminder... If the EPC is a co-borrower on the loan, it cannot receive working capital at closing. This is an important reminder to lenders because disbursing agents, particularly title companies, will automatically assume that remaining funds flow to the party involved with the real estate. If there is working capital in the loan, it goes to the operating company. The EPC/OC rules are simple… Unless you break them. SBA lending is all about knowing the rules, compliance, and communicating effectively throughout the closing process.

How to Spot a Predatory Lender… Before It’s Too Late Most sponsors focus on rate and leverage. The real danger is in the details nobody reads or understands how they can be weaponized against you. I’ve been through it and here’s what I look for: → Minimum interest on the full commitment, not the drawn balance. You haven’t deployed the capital yet. You shouldn’t be paying interest on it. Miss this on a construction loan and your effective exit fee is 5 to 7% before you know it. → “Lender discretion” language. Every time you see this, the lender just wrote themselves a blank check, redeemable at the moment you have the least leverage. Strike it everywhere. Force a defined standard. → No draw timeline in the loan docs. Without one, they can take as long as they want while your subs walk off the job and your debt yield quietly collapses. Industry standard is 3 weeks. I’ve seen lenders stretch it to 10. Get a deadline in writing. → Reserves with no release mechanism. Capital that goes in but can’t come out isn’t a reserve, it’s a hostage. Every reserve needs an objective, measurable release trigger. If it’s subject to lender discretion, see point two. → Completion guaranties that never burn off. Full personal liability shouldn’t survive into the operating phase. Push for automatic conversion to bad boy carveout at a defined stabilization threshold. No finish line, no deal. → Exorbitant deposit fees. A deposit is not payment in full upfront. I’ve seen $100k in gross deposits. Push back. Hard. → No invoice disclosure on lender legal fees. No itemization means a lump sum at closing you can’t challenge. Require detailed invoices with description, hours and date. Then negotiate a cap. Both. Not one or the other. → One sided breakup fees. If the fee only runs against you, it’s not a breakup fee, it’s leverage to force you to accept terms you’d otherwise reject. Limit remedy to deposit forfeiture and none of they deviate materially from the term sheet. → They’re more eager to lend than you are to borrow. That enthusiasm isn’t generosity. It’s fees, a loan they plan to sell, or a setup. You know what your deal can support. Don’t let the promise of higher proceeds pull you into a structure the property can’t carry. Most of this is negotiable. A good lender will strike it without much pushback. But here’s what most people miss: whether or not they remove it, the fact that it was in there tells you exactly how they think. These clauses don’t end up in loan docs by accident. They’re drafted by people who have been in workouts and know exactly how to use them. If you ever hit a rough patch, bad market, construction delay, lease up takes longer than projected, you now know what playbook they’re running. Choose your lender accordingly. If I missed any, please share in the comments below. Also if you disagree with any of the above, please share in the comments.

We thought it might be important to review the differences between an actual loan commitment and a letter of intent (LOI). We talk to many businesses thinking they had a loan commitment when it was just an LOI, and thusly, being much further away from closing than they realized. A LOI is a non-binding document that outlines the basic terms of a debt deal. The non-binding points are usually spelled out with "This is in no-way to be considered a commitment to lend" or words to that effect. A loan commitment is a binding document that often requires specific conditions be met before closing. A LOI typically includes bullet point details on the amount of money that will be borrowed, the interest rate, and other general terms, such as when payments must be made and whether any collateral or guarantees will likely be required. A loan commitment, however, contains all this information in detail and imposes certain conditions that must be satisfied before closing (some might call stipulations or conditions for closing). It's important to understand the difference between these two documents when negotiating debt deals so that you can ensure all parties involved are clear on their responsibilities and rights and most importantly, where a deal is in terms of chances of closing.

The small business owner is no stranger to the dreaded personal guaranty. A personal guaranty makes the individual that signs it liable for any debt owed by the business to the lender or commercial landlord. Yes, this means your personal assets (such as bank accounts, real estate, etc) can become collectible. Don’t make the mistake of assuming the entity acts as legal protection to prevent a lender from pursuing personal assets - that goes out the window when a PG is in force. If you’re the business owner, you want to understand and limit this provision as much as you can. Here are four tips: 1. Know what you’re signing: understanding what will trigger a PG is important. Triggers can include a technical default (even if cured), additional borrowings, sale of assets, death or incapacitation. 2. Know who you’re signing: In partnerships, the lender or landlord will often require each person signs a “joint and several” PG agreement. You might think that this allocates the risk out evenly among the partners, but that is not the case. It allows the lender or landlord to pursue whichever partners it wants and those with the most liquid assets are usually the most vulnerable. 3. Limit the scope of risk: this is more difficult to do with financial institutions, who will always want an unconditional or unlimited guaranty. However, you can ask that it be limited in other ways, such as in terms of actual dollars or based on a percentage of the outstanding balance. In a partnership situation, you can ask to limit the amount of exposure based on the size of each partner’s owner ownership stake. 4. Keep the door open for future negotiations: even after signed, you can always try to renegotiate the terms based on improved financial performance, increased business collateral, or a strong track history of payment. There’s no getting around it - the personal guaranty comes with the territory in business. Work with your counsel to develop a strategic approach and assessment of what makes sense for your business to minimize your personal risk and keep things moving. #smallbusiness #personalguaranty #contractnegotiation #business #businessattorney #commercialrealestate #contractdrafting

The median indemnification escrow is 10 percent of deal value. On a $15M exit, that is $1.5M sitting in an account for a year while the buyer decides whether to come after it. Representations and warranties are where your headline sale price meets reality. Most founders fixate on the top line number. The reps and warranties section of the purchase agreement is where it gets chipped away. These provisions decide who pays when undiscovered problems surface. How long your liability lasts after close. How much of your proceeds stay at risk. Reps are statements of fact about your business at closing. Your financials are accurate. You own your IP. No undisclosed litigation. Warranties are forward looking promises that certain conditions remain true after close. The buyer can claw back from escrow or from you directly if anything you represented turns out to be false. Key things to negotiate. The survival period. The escrow percentage. The indemnification cap. The basket or deductible threshold before claims kick in. Reps and warranties insurance can shift this entire dynamic. But it has to be in the LOI. Do not wait until the purchase agreement hits your desk to understand what you are signing. By then, the terms that matter most are already set.