With the gradual easing of Covid-19 restrictions across the UK, you might be thinking about taking on some form of debt to fund your commercial goals. Here's three tips to consider before taking out your first business loan.
1. Ask - “What’s the debt for?”
All debt must eventually be paid back and comes with an array of legal obligations, it is therefore very important that you ask yourself why you’re looking to take out a loan. Taking the time to consider this point is important because it might ultimately help you rule out the need for the business taking on unnecessary debt. For example if your existing business is struggling, taking on debt may not be commercially appropriate and it might be better to explore alternative options such as restructuring. If the purpose of the loan is help finance a next step in your business plan or capitalise on a new commercial opportunity then it might be appropriate to explore the type of loan which is most suited to your business needs.
2. Think - “What type of loan do I need?”
If you think taking on debt is the best option for the business then the next step is to consider what type of loan and lender would best help realise the business purpose which you have identified above. Some examples include:
Term Loan
A term loan is a form of debt provided by a lender for a designated purpose that is to be repaid in adherence with the terms of a repayment schedule agreed from the outset with the lender. There are many types of term loans available, for example, small business loans or bridging loans - each which come with tailored terms and conditions.
Revolving Credit Facility
A revolving credit facility is an ongoing line of credit set aside by a lender for a specified period for a designated purpose. A common example of a revolving credit facility is an overdraft to be utilised for general business expenses. This type of debt provides greater flexibility as it can be withdrawn and repaid at any point during the specified period up to a commitment limit (i.e. the total amount that the lender is willing to provide).
In other words, borrowers can draw down whatever sum they need (within the commitment limit) when they need it. The debt can then be pay back when appropriate, provided that the total amount(s) drawn are repaid in full, together with any interest and expenses, before the final repayment date agreed with the lender.
Equally, you should consider whether you want to seek a loan from a bank or an alternative lender. Banks tend to offer different packages based upon current market conditions, for example, some banks might have a greater appetite for risk to grow some of their particular lending / industry type portfolios. Alternative lenders will commonly focus on specific industry sectors with differing appetites for lending in those particular markets.
3. Pause – "Should I seek legal advice?"
Once you've decided upon which type of loan and lender would be most suitable to your business needs, consider instructing a solicitor to advise on and negotiate the legal documents. A banking solicitor can assist as early as the heads of terms stage, where the parties outline the key legal and commercial terms on a single document, to be used for completing the proposed loan agreement. It is worth bearing in mind that even if you opt not to appoint a solicitor at this stage and are happy to negotiate the heads of terms directly with the lender, there are terms of the loan documents, including borrower representations, warranties and undertakings, the practical and legal implications of which an experienced solicitor can advise you on.
If you would like to discuss any of the content contained in this article or are thinking about taking out a business loan, please do not hesitate to contact me or a colleague from our Banking & Finance Practice Area, as we’d be delighted to assist.
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