Commercial loans are a cornerstone of business financing, enabling companies to expand, invest, or manage operations. Whether you’re a borrower seeking capital or a lender providing funds, the commercial loan process requires balancing a borrower’s needs with the lender’s protections.

While every transaction is unique, most commercial loans follow a similar framework. Legal counsel plays a pivotal role at each stage, ensuring that the legal documents accurately reflect the parties’ agreement and that their client—whether lender or borrower—is well-protected and informed of potential risks.

Key Stages of a Commercial Loan Transaction

1. Term Sheet: Setting the Framework

The process typically begins with a term sheet, a non-binding document summarizing the key terms and conditions of the loan. While the term sheet is often non-binding, it outlines critical details such as the loan amount, loan type, interest rate, repayment schedule, collateral requirements, key covenants, and fees. The term sheet serves as a roadmap, guiding the parties as they structure and negotiate the final loan documents.

2. Due Diligence: Investigating the Details

Due diligence is a comprehensive review conducted by both the lender and the borrower. Lenders evaluate the borrower’s financial health, business operations, and collateral to confirm the loan is a sound investment. This process often includes examining existing liens, ownership structures, environmental risks, intellectual property, and other factors affecting the lender’s security interest in the collateral.

Meanwhile, borrowers assess the loan’s long-term impact on their business, including financial obligations and operational flexibility. With the guidance of legal counsel, borrowers respond to the lender’s diligence requests and address any follow-up inquiries to ensure a smooth process.

3. Loan Documentation: Formalizing the Agreement

Once due diligence is underway, lender’s counsel typically prepares the initial drafts of the loan documents, including the credit agreement, security agreements, guarantees, pledges, and ancillary documents. The borrower’s legal team reviews and negotiates these documents while also preparing internal approvals, consents, and waivers required to authorize the transaction. This stage transforms the term sheet’s framework into a set of agreements tailored to the deal’s specifics.

4. Negotiations: Balancing Interests

Negotiations are a critical phase where the lender’s and the borrower’s priorities come into focus. Lenders seek protective measures, such as stringent financial covenants and restrictive provisions, to ensure repayment and secure their interest in the collateral. Borrowers, conversely, aim for flexibility to operate their business without excessive lender oversight or restrictions.

Effective negotiations require experienced legal counsel who collaborate closely with their clients to understand their goals and align the loan terms with their risk tolerance and business objectives.

5. Closing: Finalizing the Transaction

At closing, the parties confirm that due diligence is complete and all conditions outlined in the loan documents have been satisfied. Both sides conduct a final review of the documents and collect signatures. An escrow agent may serve as a neutral third party to facilitate the closing, ensuring funds and documents are handled securely and in accordance with the loan terms.

Closings may occur in person, but they are more commonly conducted via video conference (e.g., Teams or Zoom) or email, streamlining the process for all involved.

6. Post-Closing: Ongoing Compliance and Collaboration

After closing, the borrower must adhere to the loan’s terms, including repayment schedules and covenant obligations. Lenders monitor the loan, tracking collateral status and overall compliance. Both parties continue to collaborate on any post-closing deliverables, such as deposit account control agreements, bailee agreements, or landlord waivers, to finalize the transaction’s requirements.

Need Help with a Commercial Loan Transaction?

Navigating a commercial loan transaction can be complex. Our banking and finance attorneys regularly help both lenders and borrowers from the beginning to end of the commercial loan transaction timeline and are here to help. Explore our Banking and Commercial Lending practice to connect with a member of our team today.

^{*Special thanks to summer associate Eduardo Renteria for his contributions to this article.}

_{This content is made available for educational purposes only and to give you general information and a general understanding of the law, not to provide specific legal advice. By using this content, you understand there is no attorney-client relationship between you and the publisher. The content should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.}