Drafting a Commercial Loan Document

Note: Links to our free templates are at the bottom of this long guide.
Also note: This is not legal advice

Introduction

Securing a commercial loan is an essential component in ensuring successful and profitable businesses. With access to capital that may not be available through other sources, commercial loans are used to purchase or upgrade equipment, cover operating costs, finance strategic projects, purchase real estate, refinance existing debt and provide working capital. However - the process of securing a commercial loan can be complex and involve numerous steps. From due diligence to contract negotiations and assessing financial stability of the borrower - it’s important to understand the legal implications associated with the transaction and seek advice from experienced professionals.

The Genie AI team offers free access to high-quality legal documents for commercial loans that anyone can draft customise without paying a lawyer. The community template library houses millions of data points so users know what market-standard documents look like for their specific situation. This dataset provides fast and reliable guidance on how best to structure a loan transaction successfully - from understanding any risks associated with the deal or helping assess financial stability of the borrower. With Genie AI’s step-by-step guide and template library offering, accessing capital is made easier than ever before - no matter your experience level or budget!
Read on below for more information on ourtemplate library today - free access guaranteed at all times!

Definitions

Interest Rate: The rate of interest charged by a lender to borrow money.
Repayment Schedule: A plan outlining the amount, frequency, and number of payments for a loan.
Collateral: An asset used to secure a loan.
Eligibility Requirements: Criteria that must be met in order to qualify for a loan.
Credit History: A record of an individual’s past and current debts and payments.
Debt-to-Income Ratio: The ratio of a person’s total debt payments to their gross monthly income.
Personal Guarantee: A commitment from an individual to repay a loan in the event of default.
Loan Default: A violation of the terms of the loan, such as missed payments or late payments.

Contents

1. Overview of the Commercial Loan Process
2. Understanding the Key Terms of a Commercial Loan
3. Interest Rate
4. Repayment Schedule
5. Collateral Requirements
6. Identifying the Borrower and the Lender
7. Establishing Eligibility Requirements
8. Gathering Necessary Documentation
9. Assessing the Borrower’s Ability to Repay
10. Reviewing Credit History
11. Analyzing Financial Statements
12. Verifying Collateral
13. Deciding the Loan Terms
14. Determining the Interest Rate
15. Setting the Repayment Schedule
16. Drafting the Loan Document
17. Outlining the Borrower and Lender Responsibilities
18. Establishing the Terms of the Loan
19. Signing the Loan Document
20. Presenting the Loan Document to the Borrower
21. Obtaining the Borrower’s Signature
22. Securing the Loan
23. Establishing Collateral
24. Establishing Personal Guarantee
25. Loan Repayment Process
26. Establishing the Payment Schedule
27. Collecting and Processing Payments
28. Loan Default Process
29. Determining Default Conditions
30. Taking Action for Nonpayment

Get started

Overview of the Commercial Loan Process

• Understand the purpose of a commercial loan and its potential benefits
• Learn the basics of the commercial loan process, including the different types of lenders and loan structures
• Gather information on the borrower and the loan, including credit history, collateral, and more
• Prepare a loan application and submit it to the appropriate lender
• Understand the lender’s response, including any requirements they may have before issuing a loan
• Consider the different loan terms and how they affect the loan
• When you can explain the purpose of a commercial loan and its loan process, you have completed this step.

Understanding the Key Terms of a Commercial Loan

• Understand the definitions of the key terms used in commercial loan documents, such as principal, collateral, maturity date, interest rate, and payment schedule
• Research various online resources to learn more about the terms and their implications
• Review the loan terms with a trusted legal advisor to ensure you understand the implications of the loan agreement
• Check off this step when you are confident that you understand the definitions of the key terms and the implications of these terms in the loan agreement.

Interest Rate

• Establish the interest rate of the loan:
• Decide whether a fixed or variable rate will be used
• Determine the rate of the loan based on market rate
• Determine whether or not the lender can reset the rate of interest
• Establish the period of time over which this reset can be done
• Establish fees related to the rate of interest
• Set fees for rate changes
• Set fees for rate lock-ins
• Outline the process for resetting the rate of interest
• Outline the contingency plan for rate changes

You can check this off your list and move on to the next step when you have set the interest rate and fees, and outlined the process for resetting the rate of interest.

Repayment Schedule

• Calculate total loan amount and duration of repayment period
• Determine the payment schedule for the loan, including the frequency of payments, the amount of each payment and the due date of each payment
• Include any special provisions such as the ability to make additional payments or the ability to defer payments
• Specify any late payment fees that will be charged
• Include an amortization schedule detailing the breakdown of the principal and interest that makes up each payment
• Once all the terms of the repayment schedule are specified, you can add them to the loan document
• You’ll know that this step is complete when the repayment schedule has been included in the loan document.

Collateral Requirements

• Understand what collateral is and why it’s necessary for a commercial loan document
• List out the types of collateral that will be used to secure the loan (e.g. real estate, financial assets, etc.)
• Specify the details of the collateral, such as its value, who has rights to it, and who can sell it in the event of default
• Describe any additional requirements for the collateral, such as the need to maintain insurances or the need for periodic appraisals
• Determine who will be responsible for the management of the collateral

Once you’ve identified the types and requirements of the collateral and written it into the loan document, you can check this step off your list and move on to the next step.

Identifying the Borrower and the Lender

• Identify the borrower and the lender in the loan document
• Specify their respective roles and responsibilities
• Provide the relevant contact information for each
• Confirm that both parties have the necessary legal capacity to enter into the loan agreement

Once the borrower and the lender have been identified, the roles and responsibilities have been specified, and the contact information has been provided, you can check off this step and proceed to the next, Establishing Eligibility Requirements.

Establishing Eligibility Requirements

• Identify the various eligibility requirements the borrower must meet to be considered for the loan
• Make sure the borrower meets the requirements regarding creditworthiness, collateral, and other criteria
• Outline the conditions of the loan, including the interest rate and repayment schedule
• Once all eligibility requirements are established and agreed upon, the document is ready to be drafted
• You will know this step is complete when you have identified the eligibility requirements and outlined the conditions of the loan.

Gathering Necessary Documentation

• Obtain the borrower’s financial documents such as balance sheets, income statements, tax returns, and other relevant information.
• Ask the borrower to provide a business plan outlining their plans for the loan proceeds.
• Request the borrower to provide any other legal documents such as business licenses.
• Review the borrower’s credit history and score.
• Check the borrower’s references.

When all the necessary documents have been collected and reviewed, you can check this step off your list and move on to assessing the borrower’s ability to repay the loan.

Assessing the Borrower’s Ability to Repay

• Collect additional financial information from the borrower and analyze cash flow statements
• Consider the borrower’s current debt obligation and other personal liabilities
• Evaluate the borrower’s collateral and net worth
• Analyze the borrower’s management and business experience
• When you have sufficient information to assess the borrower’s ability to repay the loan, you can move on to the next step.

Reviewing Credit History

• Obtain the borrower’s credit report from a credit reporting agency
• Review the credit report, with particular attention to past payment history and any current delinquencies
• Analyze the borrower’s credit history to determine if they have the ability to repay the loan
• Make a note of any risk factors or red flags on the report

Once you have reviewed the borrower’s credit history and determined the risk factors, you can check this off your list and move on to analyzing their financial statements.

Analyzing Financial Statements

• Examine the borrower’s financial statements including balance sheets, income statements, and cash flow statements
• Analyze the information to determine the borrower’s financial status
• Evaluate the borrower’s ability to repay the loan
• Determine the amount of loan that the borrower can reasonably be expected to pay back
• Note any financial liabilities that the borrower may have

When you have completed this step, you will have a clear understanding of the borrower’s financial status and ability to repay the loan.

Verifying Collateral

• Obtain a copy of the collateral documentation, such as title documents and lien documents, to ensure that the collateral is owned by the borrower and is free of any liens
• Seek to ensure that the collateral is sufficient to secure the loan in the event of a default
• Verify the value of the collateral, including any third-party appraisals or other sources of value
• Ensure that all necessary collateral documents are signed and executed by the borrower and other necessary parties
• Once all of the required documentation is obtained and verified, you can check this step off your list and move on to the next step of deciding the loan terms.

Deciding the Loan Terms

• Agree on the loan amount and specify it in the document
• Decide on the loan terms, such as the repayment schedule, interest rate, and repayment method
• Create a ““clean”” loan document that clearly states all the terms and conditions of the loan
• Include any other conditions that may be necessary, such as a personal guarantee
• When all of the loan terms have been agreed upon and included in the document, it is time to move on to the next step of determining the interest rate.

Determining the Interest Rate

• Research current market interest rates to determine what rate you should charge on the loan
• Consider the borrower’s creditworthiness and any other mitigating factors when setting the interest rate
• Determine if the interest will be fixed or variable, and the terms of any variable rate
• Include the interest rate in the loan document
• Once you have decided on the interest rate and included it in the loan document, you can move on to the next step of setting the repayment schedule.

Setting the Repayment Schedule

• Consider the borrower’s ability to pay back the loan depending on the term length and repayment frequency
• Establish the repayment schedule by determining the loan amount, interest rate, and payment frequency
• Set the repayment schedule in accordance with the loan agreement and the borrower’s individual circumstances
• Once the repayment schedule is finalized and the terms are agreed upon by both parties, the loan document is ready to be drafted.

Drafting the Loan Document

• Identify the relevant document that applies to the transaction, such as a promissory note, loan agreement, or line of credit agreement
• Draft the document to include all relevant information, such as the names of the parties, the amount of the loan, the interest rate, the repayment schedule, and any other relevant information
• Review the document for any errors or omissions, and ensure the document is legally binding
• Once the document is completed and reviewed, it can be signed by both parties and the loan document is complete
• Upon completion of the loan document, you can move on to the next step of outlining the borrower and lender responsibilities

Outlining the Borrower and Lender Responsibilities

• List out the responsibilities of the borrower and the lender in the loan agreement.
• The borrower should be responsible for the repayment of the loan, any interest payments and any other costs associated with the loan.
• The lender should be responsible for providing the loan funds to the borrower in a timely manner and in accordance with the terms of the loan agreement.
• Make sure to include clauses outlining how the borrower will use the loan funds, as well as any conditions that must be met in order for the loan to be considered valid.
• When you have outlined the borrower and lender responsibilities and the terms of the loan, you can check this off your list and move on to the next step.

Establishing the Terms of the Loan

• Determine the amount of the loan and the loan term (length of repayment)
• Establish the interest rate of the loan and the repayment schedule
• Establish the fees associated with the loan and any other terms that are essential to the loan
• Create a timeline for the loan disbursement process
• Determine any applicable collateral that is required
• Discuss and document any conditions that must be met before the loan is disbursed

Once you have established all of the loan terms and the borrower and lender have agreed to them, you can move on to signing the loan document.

Signing the Loan Document

• Have a lawyer review the loan document to ensure its legality
• Have the borrower review and sign the loan document
• Have the lender review and sign the loan document
• Ensure all signatures are valid and in the right places
• Have the borrower and lender exchange a copy of the signed loan document
• Confirm that all parties have received a copy of the signed loan document
• Once all of the above steps are completed, you can move on to presenting the loan document to the borrower.

Presenting the Loan Document to the Borrower

• Prepare a copy of the loan document for the borrower.
• Explain the details of the loan to the borrower.
• Answer any questions the borrower might have regarding the loan document.
• Get the borrower’s agreement to the terms of the loan document.
• Once the borrower has agreed to the terms, you can move on to the next step.

Obtaining the Borrower’s Signature

• Have the borrower read and sign the loan document in the presence of a notary public
• Make sure to have the borrower provide a valid identification to the notary public
• Have the borrower provide their signature in front of the notary
• Ask the notary to certify the loan document
• Once the borrower has read, signed and had the document certified, you can move on to the next step - Securing the Loan

Securing the Loan

• Obtain the lender’s signature on the loan documents
• Verify that all requirements of the loan have been met
• Sign the loan documents
• File the loan documents with the relevant government agency
• Receive confirmation that the loan has been approved

Once you have obtained the lender’s signature, verified all requirements have been met, signed the loan documents, filed them with the relevant government agency, and received confirmation that the loan has been approved, you can check this off your list and move on to the next step.

Establishing Collateral

• Determine what assets will be used as collateral for the loan.
• Evaluate the liquidity, value, and economic feasibility of the assets.
• Consult with legal counsel to ensure the appropriate collateral is secured to protect the lender’s interests.
• Draft a collateral agreement outlining the terms of the collateral to be included in the loan document.
• Once the collateral agreement is drafted, reviewed and signed by both parties, you can move on to the next step, Establishing Personal Guarantee.

Establishing Personal Guarantee

• Review the loan agreement to ensure all parties are in agreement with the personal guarantee.
• Have the guarantor review and sign the personal guarantee document.
• Ensure the guarantor has the financial capacity to cover the loan in the event of default.
• Have the guarantor provide proof of their financial status.
• Make sure both the guarantor and the borrower provide the necessary identification documents.
• Ensure the personal guarantee document is filed with the appropriate agencies.

Once you have reviewed the loan agreement, have the guarantor review and sign the personal guarantee document, and have the guarantor provide proof of their financial status and necessary identification documents, you can file the personal guarantee document with the appropriate agencies. At that point, you can move on to the next step in the process.

Loan Repayment Process

• Determine the repayment terms of the loan: length of the loan, payment schedule, repayment period, interest rate, late payment fees, etc.
• Decide whether any collateral will be used to secure the loan.
• Draft the repayment terms in the loan document and include the details of the loan repayment process, including the payment schedule and interest rate.
• Make sure the language in the loan document complies with applicable state and federal laws.
• Review the loan document with your attorney.
• Once the loan document is finalized and executed, you can check this step off your list and move on to the next step of establishing the payment schedule.

Establishing the Payment Schedule

• Establish the payment schedule for the loan by specifying the frequency, amount, and due date for each payment.
• Consider if the loan should be amortized over the life of the loan or have a balloon payment at the end.
• Determine if the borrower has the ability to make the payments under the terms established.
• Once the payment schedule is established and agreed upon by both parties, document the information in the commercial loan document.
• You can check this step off your list once the payment schedule is established and documented in the commercial loan document.

Collecting and Processing Payments

• Establish a payment processing system or utilize an existing one to ensure timely payments from the borrower.
• Ensure that the payment processing system properly records all payments and deposits them into the account associated with the loan.
• Keep an up-to-date record of all payments received, including the date and amount.
• If the payments are not made on the designated schedule, follow up with the borrower to ensure payments are made in a timely manner.
• When all payments are collected and properly processed, you can move on to the Loan Default Process step.

Loan Default Process

• Review the loan documentation to determine the default conditions that could lead to the loan being declared in default.
• Contact the loan servicer to discuss the default conditions of the loan and any potential remedies for avoiding default.
• Evaluate the borrower’s financial situation and the possible consequences of defaulting on the loan.
• Determine the possible outcomes of defaulting on the loan.
• Establish the loan default process in the commercial loan document.
• Establish the timeline for the loan default process.
• Make sure the terms of the loan default process are clearly defined in the loan document.
• When the loan default process has been established and the terms are clearly defined in the loan document, you can check this step off and proceed to the next step.

Determining Default Conditions

• Review the loan agreement and determine the default conditions that are applicable to the borrower
• Determine the obligations of the borrower in the event of a default, including any specific requirements such as repayment of the loan or the transfer of collateral
• Draft the default conditions and have the borrower sign the document, acknowledging their understanding of the terms and conditions
• Once the document is signed, you can check this off your list and move on to the next step, Taking Action for Nonpayment.

Taking Action for Nonpayment

• Review the terms of the loan agreement, including the default conditions, to determine what steps need to be taken if the borrower fails to meet their payment obligations
• Compile a demand letter outlining the nature of the default and the remedies that the lender has in place
• Give the borrower a reasonable amount of time to cure the default
• If the borrower fails to cure the default in the allotted time, begin taking legal action, including filing a complaint in court
• Determine the amount of damages that you can recover from the borrower
• Follow the court’s instructions on how to collect the debt
• When the debt is recovered, check off this step as complete and move on to the next step.

FAQ

Q: How does a commercial loan document differ from a regular loan document?

Asked by Elizabeth on the 8th of April 2022.
A: Commercial loan documents are different from regular loan documents in that they are specifically tailored to the needs of businesses. A commercial loan document is typically used when a business is seeking a loan from a lender, such as a bank or other financial institution, to help finance their operations. The document outlines the terms and conditions of the loan, including the interest rate, repayment terms, and any collateral that has been provided to secure the loan. It also outlines any other special provisions that both the lender and borrower have agreed to.

Q: Are there any specific laws which apply to commercial loan documents in the UK?

Asked by David on the 1st of June 2022.
A: Yes, there are specific laws which apply to commercial loans in the UK. The Consumer Credit Act 1974 and the Financial Services and Markets Act 2000 both regulate commercial loans in the UK. These laws set out what information must be included in a commercial loan document, such as details of all costs and fees associated with the loan, information about repayment terms and any restrictions which may apply. They also provide protection for borrowers by ensuring lenders act responsibly when offering loans and that borrowers understand their rights and obligations under the agreement.

Q: What should I consider when drafting a commercial loan document if I’m based in Europe?

Asked by Sarah on the 21st of February 2022.
A: When drafting a commercial loan document if you’re based in Europe, it’s important to consider the local legislation that applies to your business location. Depending on where you are based, there may be additional laws and regulations which you need to adhere to when crafting your loan agreement. It’s also important to consider what type of business you’re running - for example, if you’re working with technology or services such as software-as-a-service (SaaS), then you may need to include specific provisions related to data protection or intellectual property rights in your agreement. Finally, make sure you include all relevant details about your particular needs so that both parties understand their rights and obligations under the agreement.

Example dispute

Raising a Lawsuit with A Commercial Loan

• A plaintiff may sue a lender if they believe they were misled or taken advantage of in a commercial loan.
• The plaintiff could claim that the lender violated the Truth in Lending Act, which requires lenders to provide accurate information about the terms of the loan and potential risks.
• The plaintiff could also claim that the lender violated other state and federal laws governing commercial loans, such as the Equal Credit Opportunity Act.
• The plaintiff must provide evidence that the lender was negligent or engaged in deceptive practices.
• The plaintiff could also claim that the lender breached the terms of the loan agreement.
• If the plaintiff is successful, the court may order the lender to pay damages, including any additional interest or fees that the plaintiff was forced to pay due to the lender’s negligence.
• The court may also order the lender to provide a more favorable loan agreement to the plaintiff.

Templates available (free to use)

Allonge To Promissory Note Commercial Property Loan California
Allonge To Promissory Note Commercial Property Loan Florida
Allonge To Promissory Note Commercial Property Loan Illinois
Allonge To Promissory Note Commercial Property Loan Massachusetts
Allonge To Promissory Note Commercial Property Loan New York
Allonge To Promissory Note Commercial Property Loan Ohio
Allonge To Promissory Note Commercial Property Loan Pennsylvania
Allonge To Promissory Note Commercial Property Loan Texas
Amended And Restated Agreement Loan Or Facility Agreement
Amendment Agreement Facility Or Loan
Anti Steering Loan Options Disclosure
Architect S Certificate For Initial Advance Construction Loan
Assignment Assumption Multiple Assignments Of Loans
Assignment Assumption Single Assignment Of Loans
Assignment Of Deed Of Trust Commercial Property Loan California
Assignment Of Deed Of Trust Commercial Property Loan Texas
Assignment Of Mortgage Commercial Property Loan Florida
Assignment Of Mortgage Commercial Property Loan Illinois
Assignment Of Mortgage Commercial Property Loan Massachusetts
Assignment Of Mortgage Commercial Property Loan New York
Assignment Of Mortgage Commercial Property Loan Ohio
Assignment Of Mortgage Commercial Property Loan Pennsylvania
Borrower Board Meeting Minutes To Approve A Loan Agreement
Borrower Board Meeting Minutes To Approve A Loan Agreement And Debenture
Borrower Board Meeting Minutes To Ratify Loan Agreement
Borrower Board Meeting Minutes To Ratify Loan Agreement And Debenture
Borrower Non Payment And Request For Relief Commercial Property Loan Notice
Borrowers Breach Waiver And Consent Request To Lender Loan Agreement
Borrowers Waiver Request To Lender Loan Agreement
Certificate Of Authorship Company Friendly Loan Out
Certificate Of Engagement Company Friendly Loan Out
Certificate Of Llc Interests Mezzanine Loan
Collateral Assignment Of Contracts Licenses Permits Plans Construction Loan
Commercial Property Loan Abstract California
Commercial Property Loan Abstract New York
Commitment Letter Lending Syndicated Loan
Consumer Loan Agreement
Contractor S Certificate Construction Loan
Control Contract Mezzanine Loan
Convertible Loan Agreement
Convertible Loan Agreement Heads Of Terms
Convertible Loan Note Venture Capital
Credit Loan Agreement
Deed Of Trust Assignment Of Leases And Rents Security Contract And Fixture Filing Lender Friendly Simple With Loan Contrac
Demand Of Loan Repayment Following Default
Development Document Variation Consent Request Loan Agreement Borrower To Lender
Discharge Of Mortgage Commercial Property Loan Massachusetts
Discharge Of Mortgage Commercial Property Loan New Jersey
Disclosure Statement Plan Loan Truth In Lending Act 401K
Employee Pay Advances Loans Policy
Employee Wage Deduction Authorization For Pay Advances Or Loans
Equipment Loan Agreement
Equipment Loaner Agreement
Escrow Closing Instruction Letter For Commercial Mortgage Loan
Esop Loan Agreement
Facility Agreement Bilateral Loan Agreement
Financial Covenants For Real Estate Loan Agreements
Forbearance Contract Commercial Property Loan Pre Workout
Forbearance Contract Commercial Property Loan Pre Workout California
Forbearance Contract Commercial Property Loan Pre Workout Florida
Forbearance Contract Commercial Property Loan Pre Workout Illinois
Forbearance Contract Commercial Property Loan Pre Workout New York
Forbearance Contract Commercial Property Loan Pre Workout Texas
In House Counsel Legal Opinion For Loan Transactions Bilateral Transactions

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