Bank borrowings, also known generally as loans are a long established way of financing a business. When an organisation or individual borrows from a financial institution such as a bank the loan or borrowing facility is documented in the form of an agreement. At times due to pressure, excitement or lack of technical knowledge borrowers can overlook scrutinizing the agreement before signing. A learned colleague of mine insists that people should not limit themselves to a culture of studying for examinations but of reading generally and paying attention to detail. It is advisable to run an agreement past your legal practitioner for review and possible improvement before you sign it. Another colleague says someone without or who can manage emotions takes time to review and understand a document.
Clauses in a loan agreement
The following are some of the key clauses or provisions a borrower should pay attention to in a loan agreement.
- Borrower. Confirm the identity of the borrower i.e. full and correct names.
- Type of borrowing facility This can be a revolving loan, overdraft, order finance, mortgage, etc.
- Security or collateral. A loan can be secured or unsecured. If security is required confirm the type and value of the security. A bank may also ask for guarantees or surety.
- Establishment costs. These are costs a borrower has to pay the bank as administration fees for the processing and establishment of the facility. It is a once off payment.
- Applicable interest rate. This is the rate used to calculate interest costs and can be a fixed or variable rate. Interest is also called the cost of money.
- Conditions precedent. These are the conditions that have to be met before the facility can be accessed by the borrower. These may include provision of security or certain documents.
- Draw down conditions. This is how the facility can be drawn down including any limits in amounts or timeframes.
- Period and manner of repayment. Borrowings may be repaid in fixed monthly instalments or some other agreed manner. For example an overdraft may be payable in full upon its expiry.
- Grace period. There could be a period allowed by the lender before repayments start.
- Breach. Things can go wrong so familiarise with conditions that amount to breach. For example this can be due to non-payment of instalments when they fall due, diversion of loan proceeds, material information not disclosed.
- Consequence of breach. This includes what happens in the event of breach. For example a borrower may be required to make good a breach within a certain period. If he / she fails the bank may call up the loan in full or take such other measures such as foreclosure.
- Update reports. The lender may require information regularly to monitor the company’s ability situation and ability to repay, for example quarterly management accounts and audited annual financial statements.
- Renewal. If the facility is renewal it is important to know when, how and the conditions for renewal.
Advice
Borrowers are advised to consult their financial and legal advisors before concluding major loan agreements. What is major depends with a one’s situation.
Godknows Hofisi is a legal practitioner, chartered accountant, corporate rescue practitioner, and consultant in deal structuring and tax. He writes in his personal capacity. He can be contacted on +263 772 246 900 or gohofisi@gmail.com
