A revitalised property market and record-low interest rates mean businesses should be able to find affordable financing, but only if they negotiate effectively with lenders, a Melbourne lawyer has said.
Rigby Cooke Special Counsel Daryl Lim said since most loan agreements are generally heavily one-sided in favour of a lender, it is extremely important when seeking finance that borrowers negotiate critical terms before signing.
“With signs the property market is on the rebound, and with the Reserve Bank officially lowering rates to the lowest they have ever been in Australia, with the right approach businesses should be able to secure favourable financing,” Mr Lim said.
“However, many businesses don’t realise that they can negotiate the terms of their agreements with lenders, and only engage a lawyer to review the final set of loan documents, when the terms cannot be renegotiated.”
According to the Australian Banking Association, small business loan applications rose in the June quarter, reversing a negative trend which began in 2014.
“Business should look to borrow in this low-interest environment, but they need to be careful,” Mr Lim said.
“Businesses need to be on the lookout for terms that are onerous, or may put them at risk of default, as there is no such thing as a ‘technical default’ from a lenders perspective.
“Borrowers should negotiate terms which provide room for changes in the business cycle they may be in and other normal ups and downs and experiences.
“If the agreement provides for financial covenants such as debt service coverage ratios, tangible net worth requirements, or capital expenditure limitations, the borrower will want to make sure that even in the low times of its business, it can meet those financial covenants.
“Consider the guarantees and the securities that a lender is asking for and the impact they may have on your business – remember, these are all negotiable terms.
“Also, many lenders impose a number of reporting requirements – businesses need to be aware of these, and make sure that they meet the requirements to avoid default.
“Loan agreements can be complicated documents– which is why it is important to get advice from lawyers and accountants as early in the process as possible, so you can ensure that you aren’t agreeing to terms which may put you in a difficult position, even in default, if your circumstances change.
“While low interest rates may make borrowing cheap and therefore appealing, businesses need to consider, and negotiate, all the terms of an agreement to make sure they are protected from default and getting the best deal possible.”