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Make your term loan user friendly

Are you looking to grow your business? You may want to consider taking out a term loan to get financing. There are many ways to tailor a term loan facility to your needs, while still keeping your lender happy.

A facility agreement will usually include a number of provisions that will ultimately serve to protect the position of the lender, but this is not necessarily a barrier to a strong position for your business.

The lender will normally require the inclusion of:

  1. Alliances – a contractual promise from the borrower to do or not to do a particular thing or business. Typically, these are divided into positive, negative and financial covenants. An example would be a promise made by the borrower not to acquire another business without the written consent of the lender. This can be a concern if you are looking to grow your business, so why not give it up?
  2. Representations and guarantees – the contractual declarations made by the borrower when concluding the credit agreement, which are generally repeated periodically throughout the duration of the credit agreement. Contrary to the purpose of warranties and representations in other business documents, the inclusion of these terms in a facility agreement is generally for the reason that any breach would be used as a mechanism to trigger the event of default provisions and therefore require immediate repayment of the loan.

However, waivers may be agreed that allow a business to engage in certain activities, such as taking on more debt or acquiring a new business, which may be essential for growth and development.

Exclusions that we frequently accept include:

  1. Authorized eliminations – disposals of assets within the framework of a particular set of parameters may be excluded from the restrictive clauses section of the credit agreement. Using the example of a stationery supplier, transfers of stationery inventory in the ordinary course of business may be excluded from the facility agreement.
  2. Authorized debt – you may already have debts – for example, an overdraft facility in force. This can be excluded from any commitment restricting other debts of the business. As a general rule, it would be advisable to also exclude the existence of any commercial creditor involved in the ordinary course of business.
  3. Authorized security – any other receivable which is constituted as a guarantee is also likely to be excluded from any provision for negative collateral (restriction on the granting of other collateral). Any term facility lender is likely to charge a senior fee ahead of any historical debt provider, which may require the need for a priority deed (to rank the security) or, if there are restrictions on payments made by the borrower in addition to this, a deed between creditors (to classify the title and classify the debt).
  4. Authorized acquisition – you may be considering acquiring another business, but the bank can normally prevent this under the terms of the agreement. You could include an authorized acquisition provision, whereby the acquisition can take place without the consent of the lender as long as it meets a certain set of parameters. An example of this would be that the acquisition complies with financial covenants – which can be tested on a prospective basis.

This is a non-exhaustive list of exclusions designed to ensure that using a term loan facility does not limit your ability to grow your business.

To put this into context, a stationery supplier would struggle with any restrictions on their ability to dispose of the stationery produced, this could be addressed by incorporating permitted disposals that are in the best interests of both parties, as a business in difficulty is less likely to fulfill its obligations to the bank.

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