3 min read
Identify the parties and the facility structure
The first pages of a loan agreement identify the borrower (your company), the lender, and any guarantors. Check that these match exactly the legal entity names as registered. An error in the borrower's registered name or number can complicate enforcement and may delay drawdown.
Understand whether the facility is a term loan (a fixed amount repaid over a set schedule), a revolving credit facility (you can draw and repay repeatedly up to a limit), or a combination. The facility structure affects how interest accrues and when repayments fall due.
Check the interest rate, fees, and total cost
Commercial loan agreements state interest as a margin over a reference rate (commonly SONIA, the Sterling Overnight Index Average, or a fixed rate). Understand whether the rate is fixed for the term or floating — floating rates create uncertainty in your debt service costs if rates move. Ask the lender for a repayment schedule showing total interest payable over the full term.
Fees to check include arrangement fees (typically charged on drawdown), non-utilisation fees on revolving facilities (charged on undrawn amounts), and annual review fees. These add to the total cost of the facility and should be factored into any comparison with alternative lenders.
Understand financial covenants
Financial covenants are ratio tests — usually tested quarterly or annually — that your business must maintain throughout the loan term. Common covenants include an interest cover ratio (EBITDA divided by net finance charges must exceed a specified multiple) and a leverage ratio (total net debt divided by EBITDA must not exceed a specified multiple).
Breach of a financial covenant is an event of default even if you are making all scheduled repayments on time. If your trading deteriorates and your ratios are at risk of breach, notify your lender proactively and seek a waiver. Discovering a breach and failing to disclose it is far worse than proactive communication.
Review events of default and acceleration clauses
An events of default clause lists the circumstances in which the lender can demand immediate repayment of the entire outstanding balance. Obvious events include missed payments and covenant breach, but also look for: material adverse change (MAC) clauses, which give the lender discretion to call the loan if the business deteriorates materially; change of control clauses, which can trigger if you sell the business or bring in a new major shareholder; and cross-default clauses, which link your default under this agreement to default under any other lending agreement.
MAC clauses in particular deserve careful reading — they can be broadly drafted and give the lender significant discretion.
Check personal guarantees and security
Many commercial lenders to SMEs require a personal guarantee from the director or directors. A personal guarantee means that if the company cannot repay the loan, the lender can pursue the director personally for the outstanding balance. This is a significant personal financial commitment and should not be signed without understanding the extent of the liability and, ideally, taking independent legal advice.
Security may also include a debenture (a fixed and floating charge over the company's assets), a legal charge over property, or assignment of key contracts. Understand what the lender can do with the security if you default, and ensure that any security does not conflict with existing charges already registered at Companies House.
Frequently asked questions
Do I need a solicitor to review a business loan agreement?
For smaller, straightforward facilities you may not require a solicitor, but for any loan above a material threshold, involving property security, or with a personal guarantee, independent legal advice is strongly advisable. The cost of a solicitor's review is small relative to the financial exposure you are accepting.
Can I negotiate the terms in a loan agreement?
Yes — loan agreements are negotiable, particularly covenants, prepayment provisions, and security requirements. Lenders expect some negotiation on commercial terms. However, core pricing and credit structure are less flexible than ancillary terms. Having a solicitor or corporate finance adviser negotiate on your behalf often produces better outcomes than negotiating directly.
What is an early repayment charge and when does it apply?
An early repayment charge (ERC) compensates the lender for the interest income lost if you repay ahead of schedule. ERCs vary from a fixed percentage of the outstanding balance to a break-cost calculation based on interest rates at the time of prepayment. Always check whether the facility allows penalty-free overpayments up to a certain percentage each year.
Funding for UK limited companies
Credicorp lends to your company, not to you personally — short-term working capital with no personal guarantee. See what your business could access.