Loan Agreements – a borrower’s perspective

What do you want out of your loan agreement?

Loan agreements can be long and complex documents but they don’t need to be difficult to approach. From the borrower’s perspective, it is key to work out from the start what you want from the agreement and communicate this to your lender with your lawyer’s help.

For example:

• How much do you want to borrow? It’s never efficient to borrow more than you need, but it’s also important to ensure that there is sufficient headroom in your loan agreement to deal with unexpected events and challenges along the way. Discuss with your lender, and your lawyer, how to structure your requirements most efficiently. For example, it may be possible to agree in principle to borrower further amounts beyond your facility limit in future in certain circumstances, which may be more efficient and lower your interest bill.
• What do you want to borrow for? This is obviously linked to the amount required, but it is also an important consideration in its own right, as your lender will want to understand your business plan and your financial needs before committing to lend. Working this out early will speed up the process and lead to a better outcome.
• How do you want your borrowing to be structured? Different borrowing requirements can be matched with different loan agreement structures to deliver the best outcome for borrower and lender. For example, do you need to borrow a fixed amount over a specified period to invest in new premises or assets (a ‘term loan’) or do you need variable levels of funding over time – with the ability to repay and reborrow – for working capital purposes (a ‘revolving credit facility’)? Talk to your lender and your lawyer about how to structure your loan agreement in the way which is most cost effective for you and best fitted to your requirements.
• What flexibility do you need in your business? All loan agreements come with restrictions on what you as a borrower can do in order to protect your lender’s interests. It is crucial to analyse these and discuss any flexibility you know you will need up front with your lender and your lawyer. For example, are you planning to sell some premises or a part of your business? If so, it will be worth discussing this at the time the loan agreement is put in place to ensure your lender is comfortable with the proposal and happy to consent to it.

What are you being asked to promise?

All loan agreements include representations (statements you are required to make about your business periodically), operational covenants (things you must do, or not do, while the loan is outstanding) and financial covenants (financial tests assessing your business’ performance which you must pass periodically while the loan is outstanding).

These requirements are there to protect your lender, but they need to be suitable for your business too, because it’s in everyone’s interests that you can comply with these requirements and so comply with the terms of your loan agreement.

It is therefore very important to analyse these requirements with your lawyer’s help before your loan agreement is put in place and discuss any concerns with your lender. Some examples to consider are:

• Can you make the representations which are being asked of you or do you need to carve anything out and explain why?
  • Example: you will be asked to represent that your business is not the subject of any material litigation: if you are in a dispute with anyone, you should discuss this with your lawyer and your lender and may need to amend the loan agreement accordingly.
• Can you comply with the operational requirements in the loan agreement?
  • Example: your loan agreement will prevent you from buying assets above a certain value without lender consent, save in certain circumstances. Does this give you the flexibility you need to carry out your investment plans? If not, you should discuss with your lawyer and your lender whether you can amend the loan agreement to cater for this?
• Can you comply with the financial covenants? These provisions in the loan agreement will require you to meet certain financial tests at certain points in the year.
  • Example: your loan agreement will require that your business’ earnings exceed its interest bill by a certain proportion throughout the year. Based on your business’ performance and financial projections, do you think you will be able to achieve this, or do you need to discuss adjusting the terms of the test with your lawyer and your lender? 
  • Example: you will need to be in a position to test the financial covenants at set times and in the manner set out in the loan agreement and report the results to your lender. Is your finance team able to do this or will they need more resources?

How to deal with difficult times

Many businesses find themselves in financial difficulties at some point in their lifecycle. Your loan agreement, if it is correctly structured, should be flexible enough to support you through challenging times up to a point, but if things get really difficult you may need to speak to your lawyer and your lender about amending the agreement to make it less restrictive (including on a temporary basis whilst you try to deal with the headwinds facing your business).

In these circumstances, it is vital that you speak to your lawyer and your lender as early as possible to find a way through which works for you and your business, and which still gives your lender the protections they need. Your lender will want to support you – it is in their interests as well as yours for your business to recover and survive – but to do so they will need time and information to consider the situation carefully.

How Blake Morgan can help you

Loan agreements don’t need to be stressful, but as you will see from the above, there is a lot to consider and it is very important to ensure that the agreement is suitable for you and your business, as well as your lender, from day one, to avoid misunderstandings and costly amendments later on.

The best way to do this is to appoint your lawyer early in the process and work with them throughout to ensure that your loan agreement works the way it should.

Here at Blake Morgan our Banking & Finance team has the experience and market knowledge to help ensure your financing or refinancing is smooth and successful and to ensure that your loan agreement reflects your requirements and those of your business properly.

Please see our summary brochure for further details on our practice and how to contact us to help you with your financing needs.