Commercial loans and financing are some of the most common ways for business owners to access funding for growth and enhanced cash flow.
Before accessing the right financing, however, it’s important to understand what requirements a lender might have and how this could impact the success of an application.
Dashna Morarji-Sagoo heads up our Banking and Finance team, and she is taking a look at the common requirements of commercial lenders and how business owners may be impacted by them.
What will my lender need from me?
“This will depend on the amount you are borrowing and your assets,” says Dashna.
“It will also depend on the lender’s internal credit policy. Generally, the more you borrow, the greater the lender’s requirements will be.
“I would expect the lender to require security over the assets of the borrower, this could include legal charges, debenture or guarantees.
“If the borrower has limited assets, the lender may require either a shareholder or director to grant personal guarantees.”
What compliance checks will be in place
Dashna also stresses the importance of compliance with financial regulations, outlining the steps that lenders might take to reduce the risk to their own operations.
“The lender is likely to require information such as audited and non-audited accounts, PSC registers, and information to undertake Know Your Client (KYC) checks to ensure that your organisation is legitimate and eligible to borrow funds.
“If the lender is taking charges over properties, property due diligence will need to be undertaken and information will need to be provided in relation to the property, such as planning documentation and asbestos reports.”
The cost of contracts
It is important that borrowers consider the total cost of a loan, beyond repayments and interest.
“More than likely,” says Dashna, “you, as the borrower, will be required to pay for the lender’s legal costs.
“That said, the normal practice is for the lender to agree with you, in advance, any costs or expenses it incurs.
“Usually, the lender will use lawyers on its panel for the transaction so that discounted rates are applied compared with external solicitors, and the lender is likely to obtain two/three quotes for you to select from. This could be up to £10,000 (plus VAT and disbursements).”
Dashna also urges borrowing firms or entrepreneurs to understand the timescale involved in determining the cost of a loan agreement.
“The costs of implementing the lender’s requirements can only be ascertained once the lender has advised what its requirements are.
“However, it may be possible to make an estimate based on past matters and the projected amount of work involved.
“For example, if you are looking to borrow up to £5 million, I would expect the loan agreement to be short form and for the lender to seek a debenture and a personal guarantee to support the loan.
“Based on this, I would estimate our costs to be in the region of £5,000 – £6,000 (plus VAT and disbursements).”
We can provide impartial, straightforward legal advice to anyone considering commercial finance.
Contact Dashna Morarji-Sagoo by emailing DashnaMorarji-Sagoo@palmerslaw.co.uk or calling 01375 484443 or BJ Chong by emailing BJChong@palmerslaw.co.uk
The contents of this article are intended for informational and educational purposes only.