HomeFWJ TakeawayUnderstanding your loan agreement – a borrower’s perspective

Our banking and finance team at Francis Wilks & Jones frequently assists borrowers looking to arrange finance with a funder. This can be for business loans, start up loans, small business loans, unsecured business loans and many other types of business loans. Whatever your business loan advice needs, we can assist you.

We outline below just some of the issues a borrower needs to take in to account when considering taking out a business loan. There are many more important finance issues which we can guide you through in order to ensure that you are protected as much as possible. Whilst there will always be terms in a business loan agreement which favour the lender, we can advise you on the effect of these on your and where we can, renegotiate them to make them more favourable for a borrower

A borrower should completely understand all of the components of a business loan agreement to ensure it is protected as much as possible during the lifetime of the loan. Key terms that a borrower will need to consider and would benefit from specialist banking and finance advice include:

  • interest provisions – a borrower should try and ensure that it gets as low an interest rate as possible. This might seem difficult when negotiating with a finance company or bank, but it is important to try. It can make a significant difference over the lifetime of a business loan agreement;
  • repayment terms – a borrower will want to ensure that the repayment terms of the business loan are clearly specified so that it fully understands when and how much is due on each repayment date. Understanding these dates and what might trigger demand for repayment of the entire balance is vital to understand. Equally, there are very few circumstances under which a borrower would want to agree to an on-demand loan as it would need to hold the full amount of capital to immediately be able to repay on the lender’s request;
  • what constitutes an event of default – this is vitally important for a borrower to understand. In the event of a default under a business loan agreement the entire balance of the business loan may become payable at that date. If it is a business loan to a company, it might also give the finance company the ability to appoint an administrator or enforce other security it has taken in support of the finance facility. A borrower will want to limit the scope of relevant defaults if at all possible and as a minimum understand what constitutes a default under the business loan agreement and what could happen if there is a default.

It can be surprising how little it can take to trigger a default under a business loan agreement. If it happens, it can have drastic consequences for the business and any individual who has, for example given a supporting personal guarantee or indemnity.

There are other clauses which our specialist banking and finance team can advise you on and the obligations that the loan agreement imposes on the borrower. For example

  • a borrower should be aware of margin protection clauses which the lender will want to impose to protect itself in the event of the cost of lending rising;
  • the borrower should also ensure that it understands the various fees, costs and expenses it will be required to pay in addition to interest.

We can advise you on any penalties if something goes wrong under your loan agreement. The borrower will want to carefully review terms drafted by the funder and negotiate any terms which it views as onerous or may unfairly penalise it.

Whatever the nature of your loan agreement enquiry, Francis Wilks & Jones has a leading team of commercial finance solicitors to help you understand your loan agreement. We have broad expertise in drafting loan agreements and can advise you on the entire agreement or on specific business loan clauses. Our knowledge of commercial lending is second to none.

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