I know that every business needs to borrow money sometime. I don’t know whether Ben Franklin ever borrowed money for his business. I just know that he had a great deal to say about the borrower-lender relationship and the benefits of wise counsel.
From a legal perspective, I counsel borrowers to beware of three categories of traps – the unwritten, the undefined, and the unsaid, which ultimately lead to dispute, demand and default.
The unwritten generally refers to the early stages of a loan transaction, when the lender produces a sufficiently vague term sheet or a less than thorough commitment letter. By the way, a commitment letter is more a commitment by the borrower to pay fees rather than a binding commitment by the lender to lend. If there are terms that are critical to the transaction, be absolutely certain that these terms are clearly contained within the commitment. Remember, that Franklin reminded us that “creditors have better memories than debtors.” Franklin was really saying that a court will more likely rely upon a written commitment and the lender explanation of the document, rather than your unwritten recollection of the transaction.
The undefined refers to loan terms that are too undefined or vague to be of any use. For example, even if a loan is titled as “nonrecourse,” the absence of a definition could lead to personal liability. Also, undefined requirements or obligations often create additional or hidden expense. For example, a lender requiring the borrower’s financial statements to be audited or requiring excessive insurance coverage when the loan document is silent or vague. Well drafted and negotiated loan documents will allow you to avoid Franklin’s warning that “he that lives upon hope will die fasting.”
The unsaid is just that – a concern never expressed or documented because trust of the lender has replaced attention to detail. Your lender’s wink and nod puts you at ease. Remember, your bank can disappear and along with it, your banker. Your new contact may have a less favorable view of your business leading to disagreement, demand and default. Never take anything for granted when your assets are at stake. Franklin said that “as we must account for every idle word, so must we account for every idle silence.”
If you doubt any of this, remember whose face is on a $100.00 bill.