Good businesses have lots of options when it comes to raising finance.

From the high street names to less well known lenders looking to lend into a particular region or sector or offering different types of lending product intended to suit closely a business’s financing requirements.

Lots of time can be spent identifying what type of finance would work best for a business and which lender to borrow from, and in that situation it can be easy to focus on the cost of the finance. However, the flexibility and level of service the lender will provide is crucial too, particularly if it is also going to provide the business’s day-to-day banking arrangements. Money saved on arrangement fees, interest rates and other charges can soon be lost if the business cannot operate efficiently within the lender’s requirements and systems.

Then there is the legal process, in which loan agreements, security documents and guarantees are required to be entered into between the lender and the borrower.It is important not to treat these as just a formality. They may or may not be open to negotiation; if they are, then it is crucial that proper legal advice is sought to ensure the borrower can get the best position possible, but even if they are not, it is vital that the borrower fully understands exactly what it is signing up to and what the consequences are, particularly if things were to go wrong. The documents can be complex, with lengthy terms and conditions, and a review by somebody experienced in those types of documents is the best way to ensure that the relationship is being entered into on terms which all the parties properly understand.

Examples of the main issues to look out for in the documents include:

  1. In loan agreements, are the commercial terms as agreed?Are any representations and warranties the borrower gives to the lender factually correct?Is the borrower willing and able to comply with the undertakings the lender requires?
  2. Similar points also apply to security documents (debentures, mortgages and charges, for example), but in addition are the assets over which the lender is taking security agreed?In what circumstances can the lender enforce its security? Is there any existing security over the assets which needs to be dealt with before the new security can be granted?
  3. With respect to any guarantees required (particularly personal guarantees), is the amount secured agreed?Are any amounts (interest, costs and expenses) payable on top of the principal amount guaranteed agreed?Is the guarantor’s ability to terminate the guarantee properly understood?

Another issue is timing. Once a lender and a type of finance have been identified, a business naturally tends to want to access the funds as soon as possible, and in some circumstances urgent access to the finance can be an absolute must and the difference between a business surviving and failing. Lenders often sell themselves on their ability to deliver finance quickly, but it is important to factor in that the legal process can take a little bit of time, particularly if there are properties involved, and so the earlier solicitors are engaged on that the better.

Finally, the strength of the relationship between a borrower and its lender is key, as it can often help to quickly resolve issues or misunderstandings (for example, with the technicalities of the legal documents), and openness and taking the time to understand each other’s position are a fundamental part of that.Note though that it is important not to overly rely on this aspect, as the people involved in the relationship, particularly on the lender’s side, can often change, especially if a business starts to show any signs of distress. So getting the legalities right at the outset can save lots of difficulties further down the line.

For further information relating to the points raised in this article, please contact Michael Kidd, Partner and Head of the Banking & Finance Team who regularly act for borrowers and lenders on issues relating to financing documents.

Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.

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