Understanding the terms of your company bank loan

1 December, 2018

Many contract caterers will require a bank loan at some point – be it on establishment, for growth or for survival. Kevin Finlayson, associate at law firm Cripps Pemberton Greenish, has a plain English guide to the terms you are likely to encounter when considering in a business loan.

Loans (also known as facilities) are usually either “term loans” or “revolving credit facilities”. Both types are called “committed” because the lender is obliged to lend once signed up. Term loans involve borrowing an up-front lump sum and repaying either in a lump sum at the end of the term (a “bullet”) or in regular instalments (“amortisation”), with or without a large payment at the end (a “balloon” payment). A revolving credit facility allows the borrower to make multiple draw-downs, make repayments and re-borrow amounts repaid.

Overdrafts are “uncommitted”, where the lender isn’t obliged to lend. They are also repayable on demand.

Caterers often have both a term loan for longer term finance, and an overdraft to cover more immediate cash-flow demands. Larger businesses may also have a revolving credit facility. Larger loans may be syndicated (have more than one bank lending), but most loans will be bi-lateral (with only one bank).

Security and guarantees

Loans are either secured or unsecured. Secured loans give the bank an interest in the company’s assets (property, stock, cash etc). Caterers should ensure the terms of the security don’t prevent them from carrying out their business or conflict with the terms of other security already in place (negative pledges). If a loan is unsecured the lender may instead ask for a personal or parent company guarantee – for smaller food businesses this will be something to think carefully about.

Drawdown and repayment

A simple loan will require drawdown (i.e. for you to take the money) at commencement and full repayment on an agreed date. More complex arrangements may allow multiple drawdowns (with conditions which must first be satisfied called conditions precedent/CPs) and/or repayment in stages. Many loans either do not allow or penalise early repayment, cancellation or failure to draw-down all available funds.

Interest

Interest payable on the amount borrowed is usually “variable” – equal to the bank’s base rate (as it fluctuates each day) plus a margin (e.g. 2%). Watch for a high default interest rate, the amount you have to pay if you fail to make a repayment on the agreed date.   

Covenants

In the loan agreement you will agree (covenant) to do, or not do, certain things (provide certain information, meet specified financial criteria for example). Covenants are important. They can limit your ability to sell assets, take on additional borrowing and make changes to your business, so it’s important for caterers to review this small print and ensure their work and product will not be affected. A breach will be considered a defaulting event which may enable the bank to demand early repayment plus a penalty.

Conclusion

While the terms of most bank loans will be fairly standard and non-negotiable, having a proper understanding of them is nonetheless critical. Breach can be costly and affect your ability to get future credit.

For more information about borrowing from a bank, including reviewing the proposed covenants, contact Kevin Finlayson on  kevin.finlayson@crippspg.co.uk.

This article first appeared in B&I Catering in December 2018.