The coronavirus crisis has made the ability to secure additional lending vital for businesses. However, as the CBILS programme likely comes to an end over the next few months, businesses may find working with lenders becomes more challenging. So, what do businesses need to know about negotiating with lenders to help them get the best and most appropriate deal possible?

First of all, businesses need to identify their aims and objectives for the funding and how these may change over time to ensure that the requested facility would remain suitable over the term of the loan, or at least the first few years.

It is also critical to decide what your priorities in the negotiation are and what you are willing to compromise on to secure the funding. Each business will have different priorities, but some of the main ones are likely to be the price of lending, how much you want to borrow, how and when you want to repay the loan and any requirements for further follow-on funding.

The flexibility of funding arrangements is another thing to consider, especially as the inclusion of certain clauses can help alleviate the pressure on borrowers during times of stress. Flexible terms businesses might want in an agreement include:

  • A mulligan – a clause that means a breach of a covenant will not be treated as an immediate event of default. A breach of that covenant would have to take place twice for an event of default to occur

  • Equity cure options – a clause that allows your shareholder to invest equity into the business to remedy the default if you breach a covenant

  • Access to wider banking products without requiring approval from the lender, such as leasing and HP finance, hedging products and FX

  • A clause giving you the ability to pay cash dividends to shareholders during the term of the funding subject to certain conditions being met

  • The ability to cure technical defaults (e.g. late delivery of management accounts) within a reasonable timeframe

When ready to approach a lender, businesses need to remember that any discussion is a commercial negotiation. A lender will have their own aims and targets to meet. Their primary focus will not always be achieving your objectives!

During the initial stages of the negotiation many lenders will focus discussions on the positives of the arrangement that you are entering into. Many of the more complex and potentially contestable issues may not be raised by lenders until the documentation stage, leaving you little time and with limited leverage to negotiate them. These can include:

  • A discretion to withdraw funding if a lender’s policy towards a certain sector changes, even though the loan is marketed as a committed facility

  • The ability to vary LTV rates on asset based funding in order to reduce the lender’s exposure – this could leave your business with a significant funding shortfall and under pressure to seek another lending arrangement

  • The ability to change the funding base rate used to calculate the pricing of the loan

It is vital to clarify the key commercial terms and ensure that you raise any concerns you may have before proceeding with the funding. 

Often what is more important than what is in the term sheet, is what is not included. In most cases the potential borrower’s position is strongest in the early stages before a term sheet is signed. 

Throughout this entire process, using a debt advisory specialist can be useful. Right from the off, they can help you to review and assess your business objectives and forecasts, determine how to present them to lenders, and provide you with an outline of what lending options (including alternatives) are available to you in the wider market.

A debt advisory specialist can also improve your negotiating position by running a focused process with selected lenders to create some competitive tension.

Critically, a debt advisory specialist knows what to look out for throughout each stage of the negotiation and documentation of the loan. This can help you avoid falling into any traps, make sure you understand the terms you are agreeing to both commercially and legally, and ensure that you get the best deal possible.

At Altenburg Advisory, we have strong working relationships with lenders and can help you determine which funding options are most suitable for your business. We advise from day one all the way through to drawdown.

Altenburg Advisory is part of ACP, a debt advisory led corporate finance association between Altenburg Advisory and Cadence Advisory.

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