Six biggest pitfalls in business banking offer letters
The most common and expensive pitfalls borrowers fall into when signing bank offer letters are misunderstandings. The most common are discussed below:
1. Security especially personal guarantees
Despite requirements to obtain legal advice before signing a guarantee, this area remains a source of great angst and financial stress for many guarantors especially in situations involving business partners, non-working spouses and family members.
2. Margins and fees
There are many components which go in to make up the cost of borrowing including base rates, margins, line fees, utilisation fees, unused fees, facility fees etc. What might on the surface look like an attractive deal could prove to be just the opposite when you really understand all the fees.
3. Expiry and review dates
Loans must be repaid on or before the expiry date. The bank is under no obligation at all to continue to support you. Your bank could refinance the old loan with a new one but increasingly banks are electing to re-coup their capital and then lend it out to other parties considered safer risks. A review date is slightly different in that it gives the bank the right to decide whether it wants to continue to provide the loan.
4. Break costs and prepayment clauses
You can get caught out by break costs or prepayment fees if you want to pay back the loan prior to expiry, especially if you have a fixed rate in place can be costly.
5. Definitions of covenants
A slight misunderstanding of the definition of a covenant could see you in breach of the offer letter.
6. Events of review and default
Most offer letters will have events of default and some will also have events of review. As with “expiry and review dates” above, there is a big difference between the two. A review will allow you more time to convince the bank that you have things under control. A default on the other hand gives the bank the right to immediately call in your loan or appoint an agent to take control of your business.
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