Applying for finance? Check the loan agreement beforehand

Thousands of businesses are likely to apply for finance as they attempt to deal with cash flow issues related to the coronavirus pandemic, including via the Government-backed Coronavirus Business Loan Scheme (CBILS), Large Business Loan Scheme (CLBILS) and COVID-19 Corporate Financing Facility (CFF).

These loans, although backed by the Government, are not without risk and businesses will remain 100 per cent liable for the finance they take out.

The commercial terms on these loans are likely to differ drastically as they are being provided by different accredited lenders via the British Business Bank.

As a result, the loan agreements that you are required to agree to may vary depending on the requirements of each lender and your financial position.

Loan agreements will typically include the following points, which should be carefully reviewed:

Conditions Precedent – conditions a lender needs to be met by a borrower before agreeing to release the funds.

Interest – the agreement should clearly set out whether interest is payable on the loan being made and if so, at what rate.

Repayment – the loan agreement should set out how the loan is to be repaid and whether additional voluntary payments can be made to settle the debt early. Be careful as early repayment could result in additional fees being charged.

Indemnities – lenders may require indemnities that promise to pay to the lender on a pound-for-pound basis on a particular type of loss arising, such as in the event of a default on the loan.

Representations or warranties – lenders may use representations and warranties to limit their lending risk.

Financial covenants – in a commercial loan these define the parameters within which a borrower may operate its business and can include:

  • How a lender monitors a borrower’s financial position during the loan;
  • Early warning requirements of financial difficulty; and/or
  • Means to enforce financial discipline.

Default Events – the agreement should specify under what circumstances would give a lender the right to demand early payment. These should be tailored and negotiated as appropriate and in light of the current crisis.

Securities – lenders may ask for security against the loan they are making, this is usually an asset that can be sold to recover debts. The Government has already stepped in to prevent the requirement for personal guarantees for loans of £250,000 or less, but it is important to check whether any securities are listed.

Loan agreements can be complex and very onerous, and so it is important that they are checked thoroughly beforehand by a legal professional to ensure you aren’t obligating yourself to a condition you aren’t comfortable with or cannot meet in future. Speak to our team to find out how we can help.

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