Perspective of the Borrower need to be Negotiated

General Overview

A borrower’s principal objectives in negotiating a loan are as follows:

• Ensure funds will be available when needed.

• Obtain funds at the most advantageous financial terms possible (e.g., the lowest inter-est rate possible).

• Provide for the repayment of the loan over a period that will not place an undue bur-den on it.

• Ensure it can comply with all other terms of the loan agreement (such as financial

covenants) in its ordinary course of business.

The lender’s objectives for the loan agreement are as follows:

• Set out the conditions under which it will be obligated to disburse funds under the loan

agreement.

• Enable it to monitor the borrower’s financial situation and, when necessary, to take

remedial action if the borrower experiences serious financial difficulties.

• Provide itself with a legally enforceable claim to its funds, or access to other remedies,

if the borrower defaults


Preliminary Considerations
Term Sheet
Most loan negotiations begin with the lender preparing a document variously called a term sheet, mandate letter, or engagement letter. This document sets forth important terms of the loan, including key financial terms, such as the interest rate and repayment period. A term sheet can be thought of as the genetic code that will govern the contents of the final loan agreement. It should specifically state that it is not intended to be a binding obligation for either party so that neither party can assert that it is enforceable or that one party is liable to the other for costs incurred or action taken based on the term sheet.
Borrowers usually are asked to indicate consent to the terms set forth in the term sheet by countersigning it. Accordingly, the best time for borrowers to negotiate or clarify financial terms is at the term sheet stage, because lenders will argue that their proposed lending terms are based on the term sheet. Borrowers should not assume that these basic terms will remain open for discussion after the draft loan agreement has been prepared, because lenders often receive approval from their credit committees or other internal bodies based on the term sheet.
Local lenders with informal lending procedures may not always use term sheets (par-ticularly for short-term borrowing and off-the-shelf loan products). Even if a lender does not require or prepare a term sheet, the borrower may wish to draft one for its own records or for use as a planning and negotiation tool when discussing specific terms of a prospective loan both internally and later with prospective lenders