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Acceleration Clauses in Business Loans And Commercial Leases

A provision, or covenant, of many business loans and commercial leases is an acceleration clause. The acceleration clause in the loan/lease agreements allows the lender to accelerate their collection of payments contingent on an event occurring - usually lack of payment by the borrower. Failure to keep the property adequately insured, failing to pay tax assessments, not maintaining the property, selling the property/asset, etc., can also be events that start the process of the acceleration clause.


Lenders view the acceleration clause as an important tool in their business loan and commercial lease programs. Loan/lease documents might not specifically address the foreclosure of a property or repossession of an asset, but this is where the acceleration clause comes into effect. Without the acceleration clause the lender would only be able to foreclose on one missed payment at a time. With the acceleration clause, despite whatever event kicks the clause into gear, the lender can demand immediate and full payment of all remaining balances and fees.


The business loan/lease documents will describe the rights, conditions, and obligations relevant to the acceleration clause. When the borrower doesn’t meet their obligations then the loan/lease goes into default. A payment that is even one day late can cause a default. Due to this, business loan and commercial lease documents should be thoroughly read and understood before signing.


Tips:


1. If a company’s slowing cash flow is going to cause a business loan default, but the company has additional unencumbered assets they may be able to negotiate with the lender by offering additional collateral 


2. If a business can catch up on their payments they can reinstate the business loan before the acceleration starts.


3. States have different rules requiring notification of an acceleration clause being exercised. Make sure you understand the laws in your state. Lack of knowledge is not an excuse.  

                              

4. When an acceleration clause is exercised on a commercial lease, there is the possibility the landlord cannot collect rent from both the defaulting tenant and a new tenant. Help yourself by assisting the landlord re-lease the property.


5. Lenders prefer not to have to go through the foreclosure process, so if your business is headed in that direction start talking with the lender about finding a solution. Communication with the lender is a good thing.


6. Some business loans and commercial leases require a “personal” guarantee from the business owner. This means that the business owner’s personal assets and credit will become involved in the event of a default. The “corporate” status of the business will not keep the lender from seizing the personal assets.


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