On June 25, 2014, The U.S. Treasury Department, through the Office of the Comptroller of the Currency (“OCC”), issued a press release that banks nationwide are making riskier loans in an effort to compete with other banks. The OCC is charged with regulating and supervising all national U.S. 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 business certainly needs access to capital, but in preparation for the next financial debacle, here are 3 precautions business owners should strongly consider when taking a commercial loan:
1. Never sign blank documents or sign documents without reading them. 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. Also, make and keep copies of any loan paperwork that you endorse, before it leaves your control.
2. Verbal promises are meaningless. If the loan officer makes verbal representations as a means 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 at a later date. I have news for you: they won’t.
3. Hire a legal professional 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 review your loan agreements. Who do you think created the loan agreements for your bank? The old adage: “An ounce of prevention is worth a pound of cure,” is an understatement when it comes to ensuring your livelihood.