With the gradual easing of Covid-19 restrictions across the UK, you may be considering taking on some form of debt to fund your business goals. Here are three tips to consider before taking out your first business loan.
1. Ask – “What is the debt for?”
Any debt must eventually be repaid and comes with a range of legal obligations, so it is very important that you ask yourself why you are looking to take out a loan. It is important to take the time to consider this point, as it could ultimately help you eliminate the need for the company to go into unnecessary debt. For example, if your current business is struggling, going into debt may not be commercially appropriate and it may be best to explore other options such as restructuring. If the purpose of the loan is to help fund a next step in your business plan or to capitalize on a new business opportunity, it may be appropriate to explore the type of loan that best suits your business needs.
2. Think – “What type of loan do I need? »
If you think going into debt is the best option for the business, the next step is to determine what type of loan and lender would best help achieve the business goal you identified above. Here are some examples :
A term loan is a form of debt issued by a lender for a specific purpose which must be repaid in accordance with the terms of a repayment schedule agreed upon at the outset with the lender. There are many types of term loans available, for example, small business loans or bridging loans – each with bespoke terms.
Revolving credit facility
A revolving credit facility is a continuous line of credit set aside by a lender for a specified period for a specified purpose. A common example of a revolving credit facility is an overdraft to be used for general business expenses. This type of debt offers greater flexibility as it can be withdrawn and repaid at any time during the specified period up to a commitment limit (i.e. the total amount the lender is willing to provide) .
In other words, borrowers can withdraw the amount they need (up to the commitment limit) when they need it. The debt can then be repaid if necessary, provided that the total amount or amounts withdrawn are repaid in full, together with interest and expenses, before the final repayment date agreed with the lender.
Likewise, you need to determine whether you want to get a loan from a bank or an alternative lender. Banks tend to offer different packages depending on current market conditions. For example, some banks may have a greater risk appetite in order to grow some of their particular loan/sector portfolios. Alternative lenders will generally focus on specific industry sectors with different lending appetites in those particular markets.
3. Pause – “Should I see a lawyer? »
Once you have decided on the type of loan and the lender that would best suit your business needs, consider getting a lawyer to advise you and negotiate the legal documents. A banking lawyer can assist you from the project managers stage, where the parties outline the main legal and commercial conditions on a single document, to be used to complete the proposed loan agreement. It should be kept in mind that even if you choose not to appoint a lawyer at this stage and are happy to negotiate the terms of the conditions directly with the lender, there are terms of the loan documents, including the representations, warranties and covenants of the borrower, the practical and legal implications on which an experienced lawyer can advise you.