From an economic point of view, financing only makes sense if the money is invested profitably, i.e. the borrowing costs are lower than the return on the investment. But even if this is the plan, credit customers are repeatedly lured into financing traps. Dr. Johannes Fiala, lawyer, and expert Peter A. Schramm, Munich, have compiled a list of possible pitfalls.
With financing on the horizon, be wary of the following:
Lack of congruence of terms:
Anyone who takes out a loan to acquire an asset, such as new business equipment, often realises too late that they are still repaying it, even though their investment will no longer yield what would be needed to pay off the remaining debt if they were to sell it spontaneously. When a replacement investment is purchased, debt is then accumulated.
Follow-up financing risk:
The situation is similar for property owners who have fixed their loan term at ten years, for example – but the money from a life insurance policy is only available as a repayment vehicle after twelve years, i.e. two years later. During the two-year time difference, the bank can enforce excessive interest rates. This is especially true if the equity invested and the loan repayments have been so low so far that no other bank is willing to participate in a debt restructuring.
Arrears, missing documentation on creditworthiness:
Termination without notice is provoked by the customer if due interest and redemption payments are not made, if documents for the assessment of creditworthiness are not submitted or are submitted in a manipulated form, or if the creditworthiness has deteriorated.
No bank is obliged to accept constant overdrafts if it has repeatedly warned you about this. The case is different if the overdraft has been repeatedly accepted without objection. Then a surprise loan termination comes “at an inopportune time,” and puts the bank in a liability for intentional unconscionable injury.
Under- and overcollateralization:
Banks can re-evaluate loan collateral at any time; a sudden under-collateralization then prepares for loan termination. This right is also available to banks that have previously worked fraudulently with investment brokers or junk real estate agents. In this respect, the credit customer is well advised to have the intrinsic value of his investments or capital assets checked himself in advance for his own account – and to stipulate the valuation standards objectively in the credit agreement. If the Bank holds more than 120 per cent of assets as collateral, it is obliged to release them. However, this must also be regulated in the contract, because otherwise the bank can choose which security it wants to waive initially.
Fixed loan with life insurance to repay:
It is not only since the financial crisis that some bankers have been blackmailing customers by saying that they will only get a loan if they take out a life insurance policy at the same time. This commission maximization model is not only often disadvantageous from a tax point of view. An expert’s report will be able to prove that financing damage for which the bank is then directly liable. Annuity loans are always cheaper or paid off faster.
House bank without alternatives:
In the case of larger loan financing, it is advisable to maintain a relationship with at least two other banks.
Interference with management:
Banks often impose their “own” business consultants on loan customers. What appears to be well-intentioned sometimes only turns out to be a measure to obtain further loan collateral or to be preferred over other creditors as a bank. It is better to carry out a control of the business relations yourself.
It is said that bank directors or supervisory board members sometimes think about who could take over the assets held by a client. “Good friends” are sometimes informed in advance, even before a credit notice has been issued. Such indiscretions violate banking secrecy and data protection. This kind of “booty-sharing” can at best be countered by strategic credit agreement design.
Locusts and collection agencies:
Some major banks have demolished their reputations by passing on credit claims to “hedge funds” and “Moscow collections”. Neither the courts nor the legislature offer any protection for the self-employed in this regard. In principle, it is advantageous to draft contracts as precisely as possible in order to better protect borrowers.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
Courtesy of www.bwagrar.de. (published in BWagrar 45/2009, page 50)
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About the author
Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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