• Coverage . Banks will want to see that their loan is protected if, for example, the business is destroyed by a fire or if the owner dies. It will require the borrower to obtain insurance policies with the bank as a named beneficiary.. As noted earlier, banks will often use a borrower’s credit score from a third party credit rating agency along with the five Cs. Credit Agreements In addition to the actual promissory note evidencing the amount of the loan and the borrower’s promise to repay, lenders will also require the borrower to enter into a credit agreement that covers the mechanics of loan administration and spells out the responsibilities and duties of both lender and borrower. (For additional information on this see the MnDEED publication Loan Documentation: An Introduction for Small Businesses. The major elements of a credit agreement are: • Credit terms . This will state the type of credit involved (e.g., term loan or revolving credit) the amount borrowed, the use of funds, the timing of loan advances, the interest rate, the repayment schedule, identification of any collateral, closing conditions that have to be met before the lender will release funds: collateral, insurance policies, personal guarantees, payment of commitment fee or loan fee, and any other conditions required by the lender. • Representations and warranties . Here the borrower attests to material facts relating to the borrower and its operations. For example: corporate existence and authority; the accuracy of financial statements and that no material change has occurred since their preparation; that the borrower holds title to any collateral pledged as security to the loan; that the borrower holds all necessary licenses and permits for conducting its business; that the borrower is not engaged in any current litigation and has no judgments against it; that the borrower is current on all its taxes—to include employment and unemployment taxes.
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