If you need a cash injection for your business to help with growth costs, or to fund the purchase of plant and equipment, diversification, or expansion, then you will need to think carefully about the finance options open to you and their potential pros and cons.
You will also need to consider your options when looking to raise money to complete a management buy-out, to acquire a competitor or a complementary business, to purchase a freehold or leasehold commercial property, or to invest in a new corporate project.
As with most things in life, the devil is in the detail when it comes to commercial finance and for this reason it is vital that, once you have identified your preferred funding provider and cleared their corporate credit checks, you consult a lawyer to advise you on the terms of the proposed arrangement and on the often-complex set of documents you will be asked to sign.
As Graham Beach, a consultant in the commercial lawyer team with Bailey & Cogger in Tonbride, Kent, explains, ‘It is important that wherever possible you seek this advice at an early stage, and ideally as soon as you receive confirmation of the key terms on which it is proposed that finance will be made available. You will only have a short window of time to try to renegotiate any provisions with which you are uncomfortable or which you consider to be unfair, unreasonable, unnecessary, or disproportionate.’
You will also only have a limited amount of time to consider, and if necessary try to reframe, the nature and extent of any associated security or personal guarantee you are being asked to provide.
Types of commercial finance
The nature of the agreement you will have to enter to secure the funding that you need will depend on the type of commercial finance arrangement you have decided to go for.
For example, an agreement which sees you secure working capital finance under the terms of an overdraft or revolving credit facility will be very different from an agreement in which you gain access to a one-off lump sum under a commercial term loan or a mortgage arrangement.
Likewise, the paperwork that will need to be reviewed will be far more extensive where you are looking to secure funding from multiple sources under a syndicated loan arrangement than it will be where there is only one provider in the frame under a bilateral loan.
Our experienced commercial finance lawyers can help you to understand the intricacies of the type of arrangement you are proposing to enter and provide reassurance that you have selected the most appropriate facility to meet your current or longer-term needs.
Terms and conditions
While most finance agreements will contain a set of fixed provisions that reflect standard industry practice, they will also usually contain a number of bespoke clauses designed to meet your own particular needs and to ensure the funder is adequately protected against your assessed risk profile. It may be possible for you to renegotiate some or all of these bespoke provisions, but only if you begin a dialogue with the funder at an early stage and go into negotiations armed with information to justify any amendments that you deem to be appropriate.
Terms that can often be tweaked, with help from an experienced commercial finance lawyer, are those relating to repayment arrangements, interest rates (including interest rate hedging in the context of syndicated lending), borrower security and applicable fees.
In many cases where commercial funding is required, the provider of the finance will insist on some sort of security being given for the amount loaned. Sometimes the requirement will be for a commercial mortgage over occupier or non-occupier owned property or land, and sometimes it will be for a legal charge to be granted over business assets or specific plant, machinery, or equipment.
The key when reviewing security requirements is to ensure that the proposed arrangement is workable. For example, with asset financing or refinancing, you do not want to enter into an agreement which will effectively restrict your ability to run your business as you see fit, or to dispose of and replace assets as and when required to meet operational needs.
It is becoming increasingly common for commercial funders to insist on directors providing a personal guarantee before they will agree to lend to a limited company. This is to ensure that if the company is unable to meet its payment obligations under the terms of the agreed facility, the funder can look to the directors to settle what is owed out of their own personal funds.
When faced with a request for a personal guarantee, there is a lot to consider – including whether it may be possible to persuade the funder to set a cap on your potential liability, or to make the guarantee time-limited so that there is a clear end point from your perspective.
You also need to examine the precise wording of the guarantee to ensure that you are not assuming any more liability than is absolutely necessary, and that there are sufficient safeguards built in to protect your position. For example, this could include a requirement on the part of the funder to consult you before making any material changes to the funding arrangement, and not permitting any further financial advances over and above that originally agreed without your express written permission.
How we can help
Our commercial solicitors have the expertise to support you in considering the various means by which your business can access the funds that it needs and to do so on fair and workable terms that do not leave you exposed to unnecessary corporate or personal risk.
In particular, we can:
- review a proposed arrangement and explain what you are signing-up for;
- flag any unduly onerous terms and support you in trying to renegotiate them;
- ensure security arrangements are fair and proportionate and do not hinder your ability to run your business or to dispose of corporate assets as you see fit; and
- ensure that your liability under a personal guarantee is kept within acceptable bounds and that you have a workable plan in place to satisfy any liability that may arise.
In short, we can help to ensure that you go into a commercial finance arrangement with your eyes wide open and with the confidence of knowing that, so far as possible, the deal you have struck is the best that could be achieved given your needs, wants and circumstances.
We can also ensure that you receive the advice you require in a timely manner, meaning that you can get the deal done quickly and according to any timescales or deadlines that need to be met.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.