Be fully aware of your exact bank terms and risks
Most businesses borrowing from a bank will consider carefully the terms of the bank facility agreement. Even in situations where there is no scope for amendment it is prudent to consider the document carefully to ensure that as a borrower you fully understand the risks.
Many of the terms in the facility letter are standard but many are obviously case-specific and some may be up for negotiation if circumstances permit.
Make sure you check key commercial terms such as:
- margin payable on the loan;
- interest periods and interest payment dates;
- repayment dates and amounts;
- fees payable and when payable;
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- availability period for drawing the facility.
Check any conditions precedent that as a borrower must be satisfied before the loan is made. Make sure they are achievable and relevant and if documents are required from a third party take steps to obtain these as soon as possible to avoid delays in drawdown.
In circumstances where the facility encompasses more than one loan to be drawn down as a project proceeds ensure that the conditions precedent are attached to the relevant loan and if the conditions are to be met in the future that they are within your control, are as objective as possible and as a borrower are achievable.
Check the security that is being requested and, in circumstances where the business is incorporated, if any personal guarantees are needed.
If personal guarantees have been agreed is there any cap on the liability?
If you require the right to clear the facility early check this is included and if any additional payment is required.
Check the events where the facility will become immediately repayable.
These are normally standard but may include change of control of the borrower.
You may want to ensure that transfer of shares between existing members or a reorganisation where the borrower remains under the same ultimate control is excluded.
You may want to try and negotiate a grace period during which a default can be remedied before it becomes an event of default allowing termination of the facility.
A facility agreement will typically include extensive representations on the part of the borrower.
Make sure that you are happy with these or if you need to make the bank aware of any matters - for example some ongoing litigation.
Termination of the facility can occur if you breach a representation so try and ensure this only occurs if the breach has a material adverse effect on your business.
The facility agreement is likely to preclude you from granting security to another creditor other than the bank.
The bank may seek to restrict your ability to pay out dividends or repay directors loans.
The bank may want a right to veto major acquisitions or disposals and will usually want to restrict other borrowings.
You may want the bank to agree to ordinary course trade credit, intra-group debt, other operational borrowings such as finance lease obligations and possibly assets you intend to dispose of in the ordinary course of business.
The facility agreement may include financial covenants.
Make sure these work for your business.
Celia Worthington is a consultant in the commercial department of Worthingtons Solicitors Belfast Office. She regularly advises corporate and charity clients on the drafting and enforcement of contractual agreements. Celia can be contacted on 02890434015 or email@example.com