Almost all businesses will need a commercial loan agreement at some point, either for start-up funding, working capital or expansion. But dealing with banks needn’t be overwhelming – as our commercial solicitor Rana Chatterjee explains.
Here Rana gives an overview of negotiating your loan terms and understanding your payment schedule. He covers the implications of giving security over business assets, as well as the importance of understanding the obligations and conditions of the loan such as interest rate hedging and anything set out in an ISDA Master agreement. Rana explains how and why reviewing documents and agreements is so important for a business to get the best possible terms and ensure compliance with finance law. He also shares more about how syndicated loan agreements work.
Negotiating your commercial loan agreement: An Overview
Do I need a lawyer to review my loan?
It is important to get lawyers involved at an early stage in a loan negotiation so they can review the documents whilst they are being negotiated. Don’t wait until a loan obligation causes a problem for your business.
Contrary to what some businesses might believe, banks are just as keen to lend you money as you might be to borrow. Loan agreements have plenty of room for negotiation and it is important that terms are negotiated to be favourable to your business.
Terms in a loan agreement can have an impact on how you run your business day to day. For example, repayment schedules impact how much money you are due to repay and over what period of time. Misunderstanding can occur over exactly how a repayment schedule is due to work and it is important that you fully understand the terms of a loan before it is signed.
What are the impacts of the security in a loan agreement?
It’s important to understand what the implications are of giving security over assets in the business. Giving security over assets can affect what you can do with those assets, ranging from whether or not you can dispose of them to whether or not you can give them as security to third parties.
Things like guarantees may also be prohibited under some security arrangements.
The security arrangements will often be set out within the loan agreement itself but occasionally there will be separate security documentation and it’s just as important to get that reviewed to understand exactly what it means for your business and the impact that giving that security will have.
What are my obligations under a loan agreement?
It is important that you understand your obligations under a loan agreement. The T&Cs of a loan agreement can restrict what you can do and may require your company to take out interest rate hedging.
Interest rate hedging is a form of protection to make sure that you are able to make repayments under a loan, even if the interest rate went up. In return businesses are required to pay for the privilege of taking out that interest rate hedging. Interest rate hedging requirements may be set out in the loan agreement but more commonly are in a separate document known as an ‘ISDA Master Agreement’.
These documents, particularly when it forms part of a loan arrangement, need careful consideration because the terms of the loan agreement and hedging agreement need to be consistent with each other. If the terms of the loan and hedging agreement contradict each other then they can put a business in a very difficult situation whereby they can’t satisfy both sets of obligations.
Do I need interest rate hedging for my loan agreement?
Hedging arrangements are common as part of larger syndicated loans where businesses borrow not just from one bank but from a syndicate of banks. Syndicated loan arrangements come with a larger suite of documentation, including things like intercreditor deeds and hedging arrangements are usually a condition of those deeds.
Wherever syndicated loan arrangements are being entered into it’s really important that a specialist banking and finance solicitor is involved at some stage to review those documents. They should be reviewed before they’re signed to make sure that they work in the way that both the business and indeed the banks intend them to.