Negotiating A Loan

A recently released report from the Brookings Institution entitled “America’s Advanced Industries: What They Are, Where They Are, and Why They Matter” highlights the strength and diversity of Utah’s economy. The report defines an industry as an “advanced industry” if it meets two criteria: 1) the industry spends heavily in research and development (R&D spending per worker in the 80th percentile or higher or more than $450 per worker); and 2) the industry employs workers with a high degree of STEM (science, technology, engineering, and math) knowledge above the national average of 21% of all workers. Using these criteria, the authors of the report identified 50 industries that invest heavily in research and development and employ highly skilled workers. These 50 industries include manufacturers, energy providers and service providers in a variety of industries, such as aerospace products and parts, motor vehicle-related manufacturing, computers and peripheral equipment, chemical products, energy industries, computer systems design, data processing and hosting, and software publishers. Many of these industries are developing “disruptive technologies” that are redefining both the workplace and our daily lives.

Overall, the State of Utah was one of only seven states where more than 10% of the workers are employed in advanced industries. And the Salt Lake City, Provo-Orem, and Ogden-Clearfield metropolitan areas were all ranked in the top 15 among large metropolitan areas with the highest percentage of advanced industries employment. While Utah’s three largest metropolitan areas are among the leaders nationwide in advanced industries employment, the composition of that employment differs from region to region. Ogden-Clearfield’s advanced industries employment was geared more towards manufacturing industries, with Ogden ranking as one of the five areas most specialized in advanced manufacturing industries. Conversely, Provo-Orem, with a large number of technology companies contributing to its reputation as the Silicon Slopes, is one of the five areas with the highest concentration of advanced services industries. The report also identified Provo-Orem as one the fastest growing areas in the advanced industries area. Finally, Salt Lake City had a more diversified industry base, reflecting a mix of both manufacturing and service industries.
The importance of these industries to Utah is evident in its impact on the Utah economy. While responsible for more than 10% of all jobs in the State of Utah, advanced industries account for more than 18% of the total output for the state, exceeding $24 billion in 2013. The advanced industries in Utah also indirectly support another 100,000 jobs in Utah, or more than 8% of Utah’s total employment.

Some Tips for Borrowers Negotiating a Loan

New loans are more complicated when a borrower already has an existing loan with another lender. It’s all about collateral. Here are some tips to keep in mind:
1. Keep the old lender in the loop. If the old loan will remain in place, new lenders may only be willing to extend a loan if there is unencumbered collateral available to secure a new loan. For this reason, it’s wise for a borrower to: (i) know exactly what collateral has already been pledged to other lenders; and (ii) keep as many of its assets unencumbered as possible to use as collateral on additional loans. Existing lenders may be willing to release some of their collateral to secure a new loan, especially when the borrower will benefit from additional credit that the existing lender is unwilling to extend. As always, be careful to keep the old lender in the loop when looking for new or additional lenders.

2. Inter-creditor Agreement. It’s common for two or more lenders to make loans secured by a single borrower’s collateral. To do this, they will enter into an inter-creditor agreement that specifies the priority of each lender’s collateral. There are two possible scenarios: (i) the lenders can split the collateral between them, each maintaining a first priority position (e.g., one lender will take inventory as collateral, and the other lender will take equipment), and (ii) each lender can take the same assets of the borrower as collateral, with one lender being in a first priority position and the other being in second position. Inter-creditor agreements can involve contentious negotiations between competing lenders, and it’s important for the borrower to have competent counsel to act play the role of a mediator. Many loan deals have failed to close because the lenders could not reach agreement on the inter-creditor document.

3. Payoff Letter. When a new loan will be paying off an old loan, the old lender will be asked to provide a letter that details exactly how much principal, interest and fees are outstanding. The payoff letter should also state that, upon payment in full of all amounts owing, the old lender releases its lien on the borrower’s assets. Some lenders forget their obligation to release liens, and it can cause future problems for the borrower. Experienced finance counsel will help the borrower remember this important step and save money in the long run.