We’ve closed several commitments for lines of credit, term loans and mortgage loans for equipment and real estate. When reviewing your term sheets or commitment letters, after you go through the borrower, loan amount, rate and fees, collateral and guarantor section, you’ll end up at a section called covenants.
The title of this article may be a little confusing, but let me de-mystify it if I can. In your business, you need funding for certain things. You might be buying a business, a building, a piece of equipment or just need funds to meet operating expenses including payroll. These things I just identified are all uses of funds.
So, you took out a line of credit, but you forgot about the 30 day annual payout requirement on the line when you signed the commitment letter. You don't have the cash to pay the line in full. So, what's next? Maybe you took out a term loan for a piece of equipment. Cash flow is really good and you're thinking about prepaying the loan to save interest expense. Good idea or bad idea? Well, it depends.