Provisions in loan and security agreement - Essay Example

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Provisions in loan and security agreement

Every single loan is given specific restrictive conditions that are unique for each loan situation. These specifications or conditions are formulated by the lender to safeguard the loan. A single restrictive provision alone is not capable of providing the necessary protection for every loan.The most extensive and generally used requisite in every loan contract is the working capital. The provision is vital as its principle is to maintain the company's present standing and ensure its capacity to repay the loan (Van Horne, Wachowicz & Bhaduri, 2005).Collectively, however, these provisions act to ensure the firm's overall liquidity and ability to repay a loan.Cash Dividend and Repurchase of Common Stock:The cash dividend and repurchase of common stock restriction is another major provision in this category. The provision is significant as its objective is to limit cash going outside the business, thus preserving the liquidity of the company.Usually, the borrower is required by the loan contract to maintain satisfactory insurance and to provide financial statements to the bank [ref.]. Also, the borrower is usually required not to put up a major percentage of its assets for sale. The borrower is also required to pay all due taxes and other liabilities, excluding those the borrower disputes in good faith. Additionally, the borrower is not allowed to mortgage or pledge any of its assets. This restriction is known as a negative pledge clause and is usually included in most loan agreements ...Show more

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Every single loan is given specific restrictive conditions that are unique for each loan situation. These specifications or conditions are formulated by the lender to safeguard the loan. A single restrictive provision alone is not capable of providing the necessary protection for every loan…
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