Loan Agreement Checklist
loan agreement Covenants/Negotiating points
1. Purpose of Loan. Many lenders will try to make this section as specific as possible, which limits the Borrower’s flexibility. Instead, the purpose of the loan should normally be for “general corporate purposes”, or something similar. The Lender will have plenty of other ways in which to check on the use of funds and the Borrower’s financial viability without having the limitation specified in the Purpose section.
2. Availability/Commitment Fee. The period of availability – the time period during which funds can be drawn under the loan agreement – should be as long as reasonably required by the Borrower. During this period, the Lender may require the payment of a Commitment Fee on the undrawn portion of the loan. This fee should be reasonable and is typically about ½ of 1% per annum. Theoretically, this Commitment Fee is paid to the Lender for their “reserving” the funds for the Borrower. Practically, this is just a way for the Lender to increase the overall effective return on the financing arrangement.
3. Notice of Borrowing. The Lender will typically require that the Borrower give a Notice of Borrowing, essentially to give the Lender time to line up the funds for the Borrower. However, since this normally only requires several days in most foreign markets, this notice period should be reasonable and give the Borrower flexibility in planning its cash needs. A 3-5 day notice period should be sufficient.
4. Interest Payment. Try to stretch out interest payment intervals. The longer, the better. Never agree to pay interest in advance, which effectively increases the cost of the loan. Interest should always be paid in arrears.
5. Prepayment. The right to prepay is very important to have on a long or medium term loan. Interest rate conditions may change dramatically or the tax position of the Company may change, requiring an adjustment to the debt/equity structure of a subsidiary.
1. Purpose of Loan. Many lenders will try to make this section as specific as possible, which limits the Borrower’s flexibility. Instead, the purpose of the loan should normally be for “general corporate purposes”, or something similar. The Lender will have plenty of other ways in which to check on the use of funds and the Borrower’s financial viability without having the limitation specified in the Purpose section.
2. Availability/Commitment Fee. The period of availability – the time period during which funds can be drawn under the loan agreement – should be as long as reasonably required by the Borrower. During this period, the Lender may require the payment of a Commitment Fee on the undrawn portion of the loan. This fee should be reasonable and is typically about ½ of 1% per annum. Theoretically, this Commitment Fee is paid to the Lender for their “reserving” the funds for the Borrower. Practically, this is just a way for the Lender to increase the overall effective return on the financing arrangement.
3. Notice of Borrowing. The Lender will typically require that the Borrower give a Notice of Borrowing, essentially to give the Lender time to line up the funds for the Borrower. However, since this normally only requires several days in most foreign markets, this notice period should be reasonable and give the Borrower flexibility in planning its cash needs. A 3-5 day notice period should be sufficient.
4. Interest Payment. Try to stretch out interest payment intervals. The longer, the better. Never agree to pay interest in advance, which effectively increases the cost of the loan. Interest should always be paid in arrears.
5. Prepayment. The right to prepay is very important to have on a long or medium term loan. Interest rate conditions may change dramatically or the tax position of the Company may change, requiring an adjustment to the debt/equity structure of a subsidiary.