2 min read
The headline terms
The first section of any offer letter states the facility amount, the interest rate (fixed or variable, and if variable, the reference rate and margin), the repayment term, and the repayment structure (amortising capital and interest, interest-only with bullet repayment, or revolving). Read these carefully — a revolving credit facility behaves very differently from a term loan even if the headline limit is the same.
Check whether the rate is quoted as an annual percentage rate (APR), a simple annual rate, or a monthly rate. The basis affects how you compare offers from different lenders. All figures quoted in an offer are specific to your application and are illustrative of the terms agreed, not a market-wide rate.
Fees and total cost of credit
Beyond the interest rate, identify every fee: arrangement or facility fee (usually charged at drawdown, sometimes also at renewal), early repayment charges, non-utilisation fees on revolving facilities, and any monitoring or administration fees. These materially affect the total cost of the facility and should be factored into your affordability calculation alongside monthly interest.
Ask the lender for a total cost of credit figure if one is not provided. A low headline rate with a high arrangement fee can be more expensive overall than a slightly higher rate with no arrangement fee, particularly on shorter-term facilities. See how to calculate what your business can afford for a worked approach.
Financial covenants
Most commercial loan offers include financial covenants — minimum ratios the business must maintain throughout the life of the facility. Common covenants include a minimum interest cover ratio (EBIT divided by interest charges), a maximum leverage ratio (total debt divided by EBITDA), and occasionally a minimum tangible net worth.
Understand what triggers a covenant breach and what the consequences are. A breach does not automatically mean immediate repayment — offers typically specify a cure period and a process for requesting a waiver. However, a breach gives the lender the right to call the loan, so know your headroom against each covenant before signing.
Security, cross-default, and other key clauses
Check whether any security is being taken — a debenture over company assets, a fixed charge over property, or a personal guarantee from directors. Understand the ranking of any charge relative to existing lenders. If a personal guarantee is required, ensure you understand its scope (limited or unlimited) and whether it is joint and several across multiple guarantors.
Cross-default clauses mean that a default under another facility (including an overdraft) can trigger default under this loan. Material adverse change (MAC) clauses give the lender discretion to accelerate repayment if the business deteriorates materially. Both are standard but worth noting. If any clause is unclear, seek independent legal advice before accepting.
Frequently asked questions
Can I negotiate the terms in an offer letter?
Yes, many terms are negotiable, particularly on larger facilities. Fees, covenant headroom, and the definition of events of default are the most commonly negotiated points. Rate is harder to move once set by an underwriting committee, but not impossible if you have a competing offer.
What happens if I do not accept within the validity period?
The offer lapses and you would need to reapply. If your financial position has changed in the interim, the new terms may differ. If you need more time — for example, to take legal advice — most lenders will grant a short extension on request.
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.