Lending money is an inherently risky business, and even if you do your due diligence and look into the creditworthiness of a borrower, there is still room for surprise—and in the lending business, surprises are almost never good. For this reason, you should take measures to protect yourself from default borrowers by drafting a loan contract that has provisions that detail what to do in the event of default and other situations.
At Cloud Willis & Ellis, our creditors’ rights attorneys can advise you on what terms to include in your lender/borrower agreements and on what you can do to protect yourself in the event of default. Protect yourself, and contact our lawyers today to get started.
Key Terms to Negotiate For
It goes without saying that borrowers and lenders do not always see eye to eye. Okay, let us revise that to “rarely ever.” If you hope to stay in business, you need to offer fair terms. However, “fair” does not have to mean “lenient.” If you make it too easy for customers to default, you may still end up going out of business…and find yourself in significant financial trouble. You need to find the happy/medium, which may mean going through several rounds of negotiations with your borrowers. Those several rounds will be worth it, however, when you are able to sign a contract that protects your best interests and still makes the customer happy.
Some key terms to negotiate for include:
Events of Default
Typically, borrowers are given a grace period in which they are afforded the opportunity to cure a default. During this grace period, it is common courtesy for creditors to leave them be; if the default extends beyond the grace period, the nonpayment becomes an “event of default,” and this is when creditors typically enact aggressive debt collection procedures. Once an event of default occurs, the lender’s contractual rights will kick in. This is why it is important to specify what, exactly, your rights should be in your contract.
It is important to specify what your rights are and when they should kick in, as, depending on the wording of your lender/borrower agreement, an event of default may arise either as soon as the default occurs or when it continues. The former is more favorable to lenders, because it gives them the opportunity to pursue payment as soon as there is a default. The latter is favorable to borrowers, as it gives them the opportunity to remedy a default over a certain period of time. Only after that specified period of time has lapsed is the creditor allowed to pursue collection actions. If possible, you should push for the former approach.
Undertakings refer to actions borrowers are and are not allowed to take during the terms of the loan. The purpose of specifying undertakings is to minimize the risk for default for lenders. Many borrowers are not willing to borrow money from a lender whose contracts contain undertakings, so you need to be careful about what types of undertakings you specify and how you negotiate for them.
Fees and Other Expenses
It is important to be transparent about what types of fees and expenses you intend to charge for lending money in the first place. This is meant to protect both you and the borrower. Moreover, it can allow you to pass expenses on to the borrower that would otherwise go to you. Again, you want to be careful with how you word this section in your contract, as poor wording can deter potential borrowers.
Conditions precedent gives lenders the right to advance the principal only once certain conditions have been met. Think, for instance, in terms of secured credit cards. Individuals with poor credit can sign up for a secured credit card only if they provide proof of employment and pay a deposit. Individuals with good credit, on the other hand, do not have to jump through such hoops and can get a line of credit simply by providing their credit scores. Determine what conditions you want potential borrowers of varying score ranges to meet and include those in your contract.
Retain the Help of an Experienced Creditors’ Rights Attorney
U.S. laws are generally in favor of borrowers, which is why it is more important than ever to establish your rights as a creditor before you lend out any money. If you want to ensure that you are paid back all or a portion of the money owed to you in the event of a default, work with an experienced creditors’ rights attorney about the provisions you need to include in your lender/borrower agreement. Contact the law offices of Cloud Willis & Ellis today to get started.