We have worked with a number of clients recently who had taken a commercial loan from their bank in the last few years.
So What is The Risk, I Have Made All The Repayments?
This is a common misconception, that if all the repayments have been made then there is nothing more to be done, the agreement stays as it is. This isn’t quite the case.
Whilst there will likely be financial tests, say a ratio of Net Profit to Repayments, or perhaps a condition that the value of the security needs to be above that of the loan, however even if these are all met then there still remains a risk.
What Does This Mean?
It is common for any loan over ten years to have a ‘Break Clause’ or ‘Renegotiation Clause’, not dissimilar to your landlord reviewing your rent at various intervals. The most common clause here is for a ‘break’ at five years, then every three to the end of the term.
What this means to you is that you can both renegotiate at this time. Or, as it normally happens, the bank will seek to renegotiate. This will typically mean a proposed increase in your interest cost.
In a competitive market with easy access to credit then banks would be less likely to enforce a ‘break clause’ because it could mean you taking your loan elsewhere. However in the present market you have banks seeking to maximise return, and very few other options to refinance being readily available.
For this reason we are seeing more banks seek to enforce these clauses.
They Have Never Done This Before
Probably not, and for the same reasons as above.
This however, is the risk we are keen to highlight now. The fact that the bank has not sought to renegotiate historically does not mean they won’t do it this time, the chances are they will certainly be looking to.
What Should I Do?
As we have said, simply be prepared. Know when any break clause is due, prepare your accounts and start to plan.
The worst thing you could do is let it take you by surprise.
We recommend you review your lending on an annual basis, this doesn’t mean transfer your borrowing elsewhere, just include your borrowing in your normal operating plan.
How Do I Know If This Clause Exists?
It will be in your loan agreement, however it is not always easy to find, so if in doubt email it to us and we will let you know, completely free and with our compliments!
Please add your comments below, or call us for more information.
0844 682 1462