SG Entrepreneurs : 7 Loan Clauses that you need to know when negotiating a loan agreement

SG Entrepreneurs : Many entrepreneurs will typically enter into working capital loans or trade facilities with financial institutions (which are members of the Association of Banks Singapore) during the course of their business.  This article will highlight 7 key loan terms that you should note when a SG Entrepreneur negotiates loan terms with a lender.

#1: Interest Rate Clause

When getting a loan for a mortgage to buy a house for example, one key clause to negotiate is whether the interest rate is a fixed interest rate or floating interest rate.  As the name suggests, a fixed interest rate is one where the interest rate is fixed.  A floating interest rate is an interest rate which depends on the inter-bank interest rate plus fixed basis points.  Most property loans provide for a fixed interest rate for the first few years and the remaining years on a floating interest basis. 

#2: Prepayment Clause

There is usually a clause that deals with prepayment.  In some bank agreements, if you prepay or redeem the loan too early before the end of the term of the loan, you would have to pay the bank a pre-payment penalty fee.  This is to compensate the bank for the interest it would have otherwise received if it continued lending you money until the end of the loan. 

The reason why this is important is because you may have bought a property for investment purposes and intended to flip it to another buyer quickly.

#3: Security Cover Clause or Loan to Value Clause (LTV Clause)

This clause requires the asset value to remain at a certain minimum price for the duration of the loan, so if your asset drops in price for the duration of the loan, the bank may ask you to provide additional security or cash to your bank account otherwise the bank may call in your loan and force you to sell off your property to repay the loan.

#4: Cross Default Clause  

Most SG Entrepreneurs understand that if they do not pay on their existing loan agreement they will be in default.  There is usually another form of default clause called a “Cross Default Clause” which states that if the borrower is in default of another loan under another loan agreement, they will be in default under their current loan agreement.

This clause is important for business owners as usually you would have trade debts and liabilities apart from your working capital loan liabilities.

#5: Material Adverse Effect Clause

A material adverse effect clause is a clause which states that the borrower would be in default under a loan if (in the view of a lender) some external event for example like litigation against the company would have a material adverse effect on the business operations of the Company. The Lender in such a situation can trigger the event of default clause and take steps to recall the loan such that all outstanding principal and interest will be repayable thereon.

#6: Material Adverse Change Clause

A material adverse change clause is a clause which states that the borrower would be in default under a loan if (in the view of a lender) some internal event for example if a director is sick, then the lender is of the view that this would result in a material adverse change in the business operations of the Company.  The Lender in such a situation can trigger the event of default clause and take steps to recall the loan such that all outstanding principal and interest will be repayable thereon.

#7: Total Committed Principal Amount

Whilst the principal amount for most loans are totally drawn down at the start of the loan, there are other loans like a drawdown facility where the lender agrees to provide a total principal amount that the borrower can draw down from (i.e. you draw down only a portion at the start and can draw down the balance of the principal later as long as the facility is in force).  So this means that if during the term if the SG Entrepreneurs are not in default and the lender has not extended the full principal amount to the borrower, the borrower can by way of a draw down notice, borrow the balance of the total outstanding principal under the loan agreement from the lender.

In conclusion, SG Entrepreneurs should spend some time studying the terms of your loan agreements before you enter into loans with financial institutions.  Even if you have a weak bargaining position, it would be good for you to seek proper legal advice to review the key legal terms that you should note so you know what the key terms you need to comply with for your loan.

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