Provisions in Loan and Security Agreement
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 (Van Horne, Wachowicz & Bhaduri, 2005).
Usually, the borrower is prohibited from selling or even marking down its receivables. Also, the company is required not to enter into any rental contract of property, except up to a certain amount of yearly rental fee. The principle behind this condition is to prevent the borrower from facing a considerable rent burden that might jeopardize the borrower’s capacity to pay the loan. ...