Getting the right deal for your store

Dentons partner Stuart Fitzsimmons on how detail can make the difference in financial negotiations

Stuart Fitzsimmons, Dentons.

THE Covid-19 pandemic has caused many businesses to review their financing arrangements, both with a view to providing additional financial support through this unprecedented period, but also with a view to the future and ensuring that they can sustain a recovery and take advantage of new opportunities which become available as life reverts to something which looks more like normal.

For many businesses, including those in the food and beverage sector, this will often involve a discussion with the bank.

When framing this discussion with the bank, with the goal of obtaining new or increased funding, it is of course important to have a clear plan.

The bank will want to know the purpose of the proposed loan, understand the full background and recent financial history of the business, and hear about the business plan for the future.

Perhaps inevitably when seeking to agree terms with the bank, businesses will focus on the headline commercial items. How much can we borrow, when do we have to repay the money, what interest rate will apply and what others costs or fees will the bank charge to us?

Depending upon the nature of the business and the type of loan, the bank may require some financial covenants – regular financial health checks on the performance of the business and, as an example, to ensure it is generating sufficient income to service the payments to be made to the bank on the loan. The business should undertake some careful financial modelling around these tests and involve its finance team and/or accountants.

However, beyond these key commercial terms, any loan agreement entered into with a bank will often contain a number of other important points which companies should fully understand, given the potential implications of the failure to comply with them.

In a worst-case scenario, a breach of the terms of the loan agreement could allow the lender to call in the loan early and enforce any security or guarantees which have been granted as support for the loan.

It is likely that the loan will contain some undertakings which can restrict the activities of the business. For example, restrictions on disposals, taking on other borrowings, making loans, granting security or guarantees to third parties, changing the nature of the business or reorganising the business in a significant way. The bank wants to know that the picture it has formed around the business in reaching its decision to lend is not going to change adversely.

However, the company must review these controls carefully to ensure that it retains sufficient flexibility to undertake its ordinary course of business without having to reach out to the bank for a whole host of consents on a regular basis and that it can implement its business plan within the boundaries of these restrictions. So, the terms may need to be negotiated.

Furthermore, the loan agreement is likely to contain a list of default events which ultimately act as potential triggers for the lender to call in the loan. These will include a failure to pay, breach of loan agreement terms, misrepresentations in information provided to the bank, insolvency events, cross-defaults caused by breaching the terms of other loan agreements that the business may have and the occurrence of other material events impacting the business, such as significant litigations or matters having a more general material adverse effect. The borrower should seek to negotiate these provisions to raise the thresholds at which they would ever come into play. So, including remedy periods or the ability to cure certain breaches and generally ensuring that breaches must be material in nature or have sufficient financial impact on the business before they can be used to call a default are ways in which some protection can be built into the language.

In a nutshell, companies should be prepared to negotiate the terms of their loan agreement with the bank. Banks will often put forward their standard forms of agreement and expect these to be accepted, but one size does not fit all and, in all likelihood, on closer inspection some tailoring to fit the particular circumstances of the relevant company, along with some legal advice, will be needed.

Do you have a business, property or legal question or issue that you would like to know more about?

Contact Scottish Grocer and we’ll put it to an expert. Call Matthew Lynas on 0141 567 6074 or email