One term I really dislike in credit facility deals is the minimum utilization fee.
I understand why it exists. If a lender is reserving capital for a borrower, that capital has a cost. It takes work to underwrite, document, monitor, and keep capital available. That money could also be used somewhere else. All that being said, I don’t like the incentive it creates.
I never want to make a borrower feel pressure to put capital to work just because the line is sitting there. Minimum utilization fees push against underwriting discipline. A credit box can only do so much. No one is saying, “go make bad loans.” The loans still have to fit the box. But in a slower month, a loan that would have normally been a pass gets another look. That’s the part I don’t like. I would rather have a smaller portfolio that is underwritten to the best standards any day of the week.
One way to solve this is to start with a smaller initial commitment and room to expand once milestones are hit. That way, the lender is not sitting with a large unfunded commitment, and the borrower is not encouraged to originate just to avoid a fee. To me, that is a much cleaner alignment. The facility can grow when the opportunity set is there, and stay smaller when it’s not.
— Jillian
Many people learned about the statute of limitations this month when it was used to turn down Elon Musk's case against OpenAI.
What is a statute of limitations? It is essentially a time limit for bringing a case from the time the infraction occurred. After that time limit expires, it doesn't matter how good your case is, it can get thrown out.
Interestingly, the statue of limitations (time limit) varies depending on both the jurisdiction and type of case. If this is new to you, don't worry, I didn't learn details about this until just a couple of years ago when we purchased a portfolio of charged off small business loans and had to file lawsuits to collect on many of them.
In Elon's case, he is limited to California as the jurisdiction (all parties based in CA, all activity happened in CA) and he brought two very specific charges that have 2 and 3 year statutes of limitations.
Elon's goal in the appeal will be to argue for a continuing violation doctrine, essentially saying that there is a long pattern of wrongful conduct rather than a single discrete act. In fact, in an interview this week, Elon pointed out that OpenAI was still supposed to revert to a non-profit after it developed artificial general intelligence. That clause was just removed just a few weeks ago. So, theoretically, he has an argument in this appeal.
How does this relate to small business loans that default? Well, first, there is a jurisdiction. Interestingly, the jurisdiction on a small business loan lawsuit can be a variety of locations, including where the borrower is based, where the lender is based, the choice of law, the jurisdiction as defined in the loan documents, and more.
Also, there is a similar continuing violation thing going on, though kind of the opposite. With small business loans, a borrower goes into default when they stop paying. So, in actually, the loan becomes active again when they make a new payment. Then, they immediately go into default again. So, the statute of limitations resets with a new borrower payment.
To be honest, I put zero value in statute of limitations as recently as a few years ago, and now we spend a good amount of time strategizing around it...just as Elon is now learning.
- Conor
