While your attentions are likely focused on meeting the main obligations under your loan agreements – making payments, meeting financial covenants, managing your security portfolio – there are plenty of other obligations throughout the agreements that can be easy to miss. Below, we set out five easy ways in which you can breach your loan agreement.
- Changing your rules without telling (or getting consent from) your lender
Checking your loan agreements might not immediately spring to mind when you are planning to change your rules or articles of association, but you may need to notify your lenders of any change or even seek consent before you do so. We recommend checking your loan agreements before you pass any rule/article change at board as some lenders may need to sign off on the wording before giving consent. - Your insurance cover doesn't meet all the requirements
Loan agreements often require borrowers to have insurance policies covering several specific risks and liabilities. Many banks are now requiring more extensive insurance cover to be taken out, so it is important to speak to your insurance broker each time you come up for renewal to make sure everything is covered and you do not inadvertently breach this obligation. - Lending money to your employees
Many loan agreements restrict the amount of financial support a borrower can provide to others, including loans to employees. There may be terms and conditions in your employment contracts that allow for employees to request loans, which could include season-ticket loans, loans in relation to other transport (bikes or cars) or IT equipment loans. These may be considered and granted on a case-by-case basis. However it is important to monitor how much is being lent to your employees in total, as your loan agreements may set a limit on how much you are allowed to lend. - Failing to deliver information
Loan agreements tend to have stringent information requirements. Not only do lenders ask for accounts, business plans and financial forecasts, you may also need to provide reports to tenants, communication received from the Regulator of Social Housing, the FCA or Charity Commission, or even documents circulated to members. To add to this huge administrative task, often the deadlines to provide each type of information is different (e.g., 5, 10 or 30 business days). Without a clear understanding of what needs to be provided and when, it could be very easy to miss something. As such it is important to keep an internal record of what needs to be provided to your funders and when. -
Not telling your Lender about a change of key personnel
If there is a change to your Chief Executive, Chair of the board or any other key personnel, there can be lots to do in terms of administration, handovers, press releases etc. You might not consider that your lenders need to be notified of the change as well, but some loan agreements do contain an obligation to notify the lender, even if it has been publicly announced.
While it is unlikely that a lender would default your loan for breaching the types of obligations listed above, it is important to ensure that you are familiar with all your obligations under your loan agreements to avoid any issues down the line.
