Business Loan Agreements - How high will interest rates go?

In the business lending world, corporate solicitors need to be adept when drafting loan agreements. Loan agreements are legally binding documents between a lender and borrower which sets out the terms of mutual obligations from both parties. They are sometimes referred to as facility agreements which the lender's solicitors usually draft. The larger the facility and the more creditworthy the borrower, the more scope the borrower will have to negotiate amendments. 

Businesses take out loan agreements for a wide range of reasons. In our experience, we found companies typically use loans for working capital, investment, expansion, buy-outs, and standalone acquisitions.

What are the clauses in loan agreements?

The loan agreement sets out certain conditions both parties agree to during the contract term. Typically, the types of clauses we would expect to see in such these agreements could be any of the following:

1. The monetary amount of the loan
2. Method of repayment
3. Conditions precedent needing to be satisfied before the funds are loaned
4. Any security required in the event of a default payment

However, one of the most important clauses found in a typical loan agreement is the 'interest payment' in the event of a default clause. Having an arrangement, loan, or facility agreement where this clause was absent would be most unusual. This is because the clause acts as insurance to the lender and a deterrent for the borrower to default on payments. In addition, a lender cannot impose whatever default interest they like as this could be deemed a 'penalty', which would be unenforceable. The unlawfulness of Extravagant Default Interest was established in the case of Ahuja Investments Ltd v Victorygame Ltd [2021] EWHC 2382 (Ch) (26 August 2021). 

What are the interest rates today?

Yesterday, the Bank of England announced its forecasts to raise key interest rates by a quarter point to 4.25%. This is a pertinent point and one worthy of consideration. Although this increase is good and possibly necessary for banks and lending institutions, it may, however, create a challenging time for businesses. 

The Bank of England's overall objective is to stabilise the economy and reduce inflation, but the question needs to be asked, how high will these rates go? Are we at the peak, or are there more increases to come? Sadly, there isn't any way of knowing.

If you are a Business Owner or Company Director needing a business loan, please do not hesitate to contact our Company Commercial team for help and advice. Our specialist team at Warner Goodman have in-depth knowledge and expertise in the following areas:

1. Bank loans
2. Inter-company loans
3. Directors' loans
4. Commercial loans
5. Facility agreements
6. Charges and debentures

For help and advice for any of the above services, please do not hesitate to contact us on 02380 717 409 or email me at naushadrahman@warnergoodman.co.uk.