Securing financing is often one of the first steps in owning and running a business successfully. But even smart borrowers can get caught in bad credit. Some precautions can help prevent common mistakes.
Get everything in writing
All terms and details of the loan must be specified in writing. A lender can make verbal promises and agreements, however, borrowers should only rely on written documentation. A legal doctrine called the “parallel evidence rule” rejects any evidence from oral court settlements if they conflict with the written loan documents.
Be careful what you offer as value
Although there are few specific rules that can be universally applied to the actual terms of a loan, a general guideline is: never offer anything like security that you cannot live without. Prudent lenders may ask for more collateral than is necessary. All assets pledged as collateral run the risk of loss in the event of loan default. Lenders often ask the borrower for not only a guarantee 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 defaults, both the borrower and the guarantor risk losing their collateral because the terms of the loan legally allow foreclosure.
Understand the Loan Agreement Before You Sign
Legal doctrines aimed at preventing fraudulent loan 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 other than bankers who can easily sort and understand the details of a loan. If you have questions about the loan or your rights, seek an attorney. Lawyers can be expensive, but you are hiring an expert who will protect your best interests. The downside to hiring an attorney is that in the event of litigation, the bank may say that because an attorney reviewed 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 arbitration clause. When you agree to these terms, know that you are giving up potential significant legal recourse. Similarly, if a lender is concerned about a potential claim, they can ask the borrower to sign a liability waiver. By signing such a release, the borrower loses the rights to a claim, so it is important that if there is suspicion of improper activity, they consult an attorney on the matter before signing the release.
Take action if something doesn’t seem right
Under a legal doctrine called “fraud waiver,” if a borrower suspects that the lender has committed a wrongful act but continues to receive substantial benefits from the same lender (such as loan funds), the borrower may lose the ability to 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 financing, but failure to do so may result in the loss of your claim. Additionally, the statutes of limitation establish time limits for filing claims. If a claim is not filed within the appropriate time, it will be rejected.
Additional tips
Not all business loans are fraught with problems, securing a loan that meets the financial requirements of your business while retaining your rights can be tricky. Exercising elements of caution and foresight can save you headaches later.