Getting a middle-market lending contract signed sounds simple. You get a loan and grow your business. People who are dealing with these types of loans know that the legal side is super important. The legal terms that you agree to upfront will give you breathing room or trap you in covenants, fees, and restrictions.
Lenders aren’t just handing out money based on a handshake. They’re structuring deals to protect themselves, and if you don’t have someone on your side who understands how these agreements work, you could end up with terms that strangle your business. The legal process behind these types of loans makes sure that you don’t accidentally sign away control or flexibility.
Going after a mid-market loan
When a company seeks a mid-market loan, the first genuine hurdle is negotiation. Money lenders come in with their way of doing things, packed with legal clauses that lock in repayment schedules, collateral requirements, and financial covenants. Borrowers often assume these legal terms are set in stone and can’t be negotiated. They aren’t.
Everything is negotiable if you know what to push back on and if you have the credibility to justify the change. This credibility is something that a business lawyer has.
A manufacturing client I worked with almost signed off on a mid-market loan that required maintaining a liquidity ratio that was entirely unrealistic for their business cycle.
If they had agreed to it, they would have been in technical default within months, even if they were profitable. After some back-and-forth, the money lender agreed to adjust the terms to match the seasonality of their revenue. That small change distinguished between an advantageous loan and the death of the company.
Once the main legal terms are hashed out, the lender moves into due diligence. This is where they dig into financials, legal paperwork, and risk factors. Think again about glossing over a pending lawsuit or regulatory investigation. They’ll find it, and if they don’t like what they see, they’ll either walk away or use it as leverage to squeeze out more protections for themselves.
Healthcare company seeking a $50M loan
I saw this play out with a healthcare company seeking a $50M loan. They had an ongoing lawsuit they thought wasn’t a big deal. The lender disagreed. Instead of rejecting the loan, they inserted a clause that would have allowed them to call in the loan early if any litigation resulted in damages over a certain threshold, which I believe was $100,000 if I remember correctly.
That’s the kind of legal clause that can destroy a business overnight. The company’s law firm caught it and negotiated it to something more reasonable. They would have been walking a tightrope for the entire loan term without that.
Drafting the actual loan agreement is where things get technical. The contract spells out the repayment structure, interest rates, fees, and, most importantly, what happens if things go wrong. Many businesses skim over the default provisions, assuming they’ll never come into play. That’s a mistake. If you don’t have a law firm, you can try out Caseway.
I’ve seen legal agreements where a missed financial covenant triggered an automatic penalty that raised the interest rate by 5%. Other contracts had a “material adverse change” clause that let the lender pull the loan if they felt the borrower’s financial position had worsened. This was true even if payments were still being made on time.
Middle-market lending
Companies have lost control of their businesses because they didn’t fight back against vague or overly broad default terms.
Once the agreement is finalized, it gets signed, and the money moves. But the legal situation doesn’t stop there. Borrowers have to comply with ongoing reporting requirements, and if they slip up. This can include late financials, a covenant breach, a missed payment. If any of these happen, the lender can tighten the screws.
Some mid-market lenders are aggressive about this, using technical defaults as an excuse to renegotiate terms in their favour. Others take a more cooperative approach, but borrowers must stay compliant or risk losing control.
I worked with a technology company that had a revenue-based covenant. They missed one quarter’s target and assumed they could explain the situation to the lender.
Instead, the money lender immediately imposed a higher interest rate, forcing them to raise additional equity to keep the loan in place. It was a costly lesson on why you can’t be complacent about compliance.
With middle-market lending, you must ensure the deal’s legal structure supports the business instead of handcuffing it. You’re at a considerable disadvantage if you’re not going into these negotiations with legal firepower. The lender isn’t doing you a favour by lending you money. They’re structuring the deal to minimize their risk; if you’re not careful, that risk gets transferred back onto you.
