Most business contracts of sale are subject to finance and unless you, as the buyer, approve or waive the finance condition under the contract by the due date, the seller has the right to terminate the contract. Before you approve your finance pursuant to the contract, you must obtain a letter of approval from your financier and preferably give a copy to your solicitor for their perusal.
Here are some common pitfalls to look out for with letters of finance approval.
Most banks provide their standard letter which simply states that your finance is approved.
You, as the buyer, must ensure two things:
that the finance approved is unconditional
that the finance letter of approval documents the essential terms and conditions of your loan.
A satisfactory letter of approval should be unconditional and include the following:
the correct name of the borrower
the loan amount
the term of the loan
the interest rate (both the higher and the lower interest rates)
the default interest rate
the repayments on the loan amount
the security mortgage
the guarantors (if applicable)
any special conditions of the loan.
All buyers should beware of satisfying their finance condition under the contract without having an acceptable letter of approval from their financier. You do not want to be in a situation where you have approved your finance based on a verbal approval or a simple letter from your financier only to find that approval was subject to certain requirements or based on different terms and conditions of the loan than you had expected.
Text by Hatzis Lawyers - NetNews
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Understanding the finance condition in business sale contracts is crucial for both buyers and sellers. This clause stipulates that the sale is contingent upon the buyer securing the necessary financing to complete the purchase. It provides a safety net ensuring that the transaction will only proceed if the buyer can obtain the funds needed, typically through a loan.
The finance condition clause generally includes several key elements. Firstly, it specifies the period within which the buyer must secure financing. This is known as the 'finance approval date.' The buyer must either confirm they have secured financing or waive this condition by the due date. If they fail to do either, the seller has the right to terminate the contract. This period allows the buyer to approach financial institutions, submit loan applications, and receive formal approval.
This clause also outlines what constitutes acceptable financing. It may include details such as the minimum loan amount, acceptable interest rates, and loan term conditions. The buyer is required to provide a letter of approval from their financier, which should ideally be reviewed by their solicitor to ensure all terms are acceptable and unconditional.
The finance condition clause protects both parties involved in the transaction. For buyers, it ensures that they are not legally obligated to complete the purchase if they are unable to secure the necessary funds. This prevents them from being financially overextended or facing legal repercussions for non-completion of the sale. It also gives buyers the confidence to enter into a contract knowing they have an exit strategy if financing falls through.
For sellers, this clause provides a clear timeline and set of requirements that the buyer must meet, reducing the risk of prolonged uncertainty. If the buyer fails to secure financing within the stipulated timeframe, the seller can terminate the contract and seek other potential buyers without significant delay. This protection ensures that the seller is not indefinitely bound to a contract that may not reach completion due to financing issues.
Negotiating finance terms with lenders for a business purchase is a critical step that can significantly impact the overall cost and feasibility of your acquisition. Securing favorable loan terms can save you money and provide greater financial stability. Here are some tips and strategies for effective negotiation:
Improve Your Creditworthiness: Ensure your credit score and financial statements are strong. Lenders offer better terms to borrowers with a solid credit history and stable income.
Prepare a Solid Business Plan: Present a comprehensive business plan that outlines your strategy, market analysis, and financial projections. A well-prepared plan demonstrates your commitment and reduces the lender's risk.
Compare Multiple Lenders: Shop around and get quotes from several lenders. Comparing offers allows you to understand the market and leverage better terms.
Negotiate Interest Rates and Fees: Interest rates significantly affect the total cost of your loan. Negotiate for the lowest possible rate and be aware of hidden fees. Ask for a detailed breakdown of all costs involved.
Consider Loan Terms and Repayment Schedules: Longer loan terms can reduce monthly payments but may increase total interest paid. Balance the term length with a manageable repayment schedule that aligns with your business's cash flow.
Seek Flexible Terms: Look for loans that offer flexibility, such as the ability to make extra payments without penalties or options to refinance if interest rates drop.
Highlight Your Strengths: Emphasize your financial stability, business acumen, and the potential profitability of the business you're purchasing. Use your strengths as leverage in negotiations.
Build a Relationship with Your Lender: Establishing a strong relationship can lead to more favorable terms. Be transparent and communicate your needs clearly.
Understand Loan Covenants: Review and negotiate covenants carefully. These are conditions set by lenders that can include maintaining certain financial ratios or restrictions on additional borrowing. Ensure these covenants are realistic and achievable.
Watch Out for Prepayment Penalties: Some loans include penalties for early repayment. Negotiate these terms to avoid being locked into high-interest payments if you decide to pay off the loan early.
Beware of Variable Interest Rates: While they might offer lower initial rates, variable rates can increase significantly over time. Consider the risk and whether a fixed-rate loan might be more beneficial.
Seek Professional Advice: Consider hiring a financial advisor or lawyer specializing in business transactions. They can provide invaluable insights and ensure you're getting the best possible deal.
By carefully preparing and employing effective negotiation strategies, you can secure favorable financing terms that support the successful acquisition and growth of your new business.
The role of a solicitor in reviewing finance letters is pivotal to ensuring that the terms and conditions outlined in the document are in the best interest of the borrower. Engaging a solicitor early in the approval process provides essential legal advice and safeguards against potential pitfalls, making their expertise invaluable.
Importance of Legal Advice in the Approval Process
Solicitors offer specialized knowledge that helps in deciphering complex legal jargon and financial terms. Their involvement ensures that the borrower fully understands the commitments and implications of the loan agreement. This comprehension is crucial for making informed decisions and avoiding unforeseen liabilities. Legal advice is particularly important because finance approval letters often contain intricate details that can significantly impact the borrower's financial health. By thoroughly examining these documents, solicitors help identify unfavorable terms and negotiate better conditions, thus protecting the borrower's interests.
What a Solicitor Looks for in Finance Approval Letters
Loan Amount and Terms: Solicitors verify that the loan amount and repayment terms match the borrower's expectations and needs. They ensure that these terms are clearly defined and feasible.
Interest Rates and Fees: They scrutinize the interest rates, including any clauses related to variable rates, to prevent potential future increases that could burden the borrower. Additionally, they check for hidden fees or charges that could escalate the cost of the loan.
Conditions Precedent: Solicitors look for conditions that must be met before the loan is disbursed. These might include financial covenants or specific operational requirements that the borrower must satisfy.
Repayment Schedule: They ensure the repayment schedule is reasonable and aligns with the borrower's cash flow capabilities, preventing future cash flow issues.
Security and Collateral: For secured loans, solicitors confirm that the collateral requirements are fair and that the borrower is fully aware of the risks of default.
Default Clauses: They analyze the terms that define a default and the associated penalties, ensuring they are not overly punitive.
Prepayment Penalties: Solicitors check for any prepayment penalties or restrictions, advising on their implications and negotiating for more favorable terms if necessary.
Legal Compliance: They ensure that all terms comply with relevant laws and regulations, protecting the borrower from legal repercussions.
By meticulously reviewing these aspects, solicitors help borrowers avoid costly mistakes and enter into loan agreements that support their financial stability and business goals. Their role is critical in navigating the complexities of finance letters and securing favorable loan conditions.
