My Queue

There are no Videos in your queue.

Click on the Add to next to any video to save to your queue.

There are no Articles in your queue.

Click on the Add to next to any article to save to your queue.

There are no Podcasts in your queue.

Click on the Add to next to any podcast episode to save to your queue.

You're not following any authors.

Click the Follow button on any author page to keep up with the latest content from your favorite authors.

Sporting Chance?

Loan agreements
Magazine Contributor
2 min read

This story appears in the February 2000 issue of . Subscribe »

Q: Our bank requires a loan agreement as a condition for a long-term loan to our sports memorabilia store. What gives?

A: Welcome to the big leagues. With term loans, banks impose conditions--called covenants--on your future operations. The agreement states your rights (few) and your obligations (many). It's the real game and wipes out all verbal understandings. The agreement may not fit all business. Three key points to remember:

1) Terms are negotiable only before you sign.

2) Never accept unreasonable conditions.

3) Never sign anything you don't completely understand.

Get a draft of the agreement. Take it home. Read it carefully. Ask your attorney and CPA to coach you. Don't agree to prepayment penalties--except for SBA 504 loans. Don't agree to maintain compensating account balances. Never sign an agreement with a deemed insecure clause. This clause lets the bank call for payment at any time.

Don't agree to a balloon note that mismatches your repayment ability with the bank's repayment schedule. Balk at any requirements differing from prior discussions. As collateral, pledge specific assets--not all current and future assets to be named. Pay particular attention to the personal guaranty form and the rules under which the bank can call on your guaranty.

The cross-default and cross-collateral clauses roll all your present and future loans with this bank into one loan. Default on one and you default on all. In the future, you may want to seed your loans among several banks.

Negative covenants list what you can't do without the bank's waiver--for example, sell the business, buy assets, sign large leases, borrow more money, change management, or pay dividends or management bonuses. Positive covenants tell what you must do--like maintain specific financial ratios, submit timely and accurate financial reports, carry life and casualty insurance and more.

Can you play the game? Match the covenants against your operations for the past two years. Did you do anything that is now banned? Can your team produce the required reports? Could you have met the required financial ratios? Based on your financial projections, can you meet them in the future? If not, call time out to renegotiate.

George M. Dawson ( is a small-business consultant and author of Borrowing to Build Your Business: Getting Your Banker to Say "Yes." (Upstart Publishing, $16.95, 800-235-8866). Send him your financing questions at

More from Entrepreneur

Learn to be a better leader and develop successful marketing and branding strategies with Dr. Patti Fletcher's help.
Jumpstart Your Business. Entrepreneur Insider is your all-access pass to the skills, experts, and network you need to get your business off the ground—or take it to the next level.
Create your business plan in half the time with twice the impact using Entrepreneur's BIZ PLANNING PLUS powered by LivePlan. Try risk free for 60 days.

Latest on Entrepreneur