How to read a business loan offer: fees, early repayment, security and covenants

A loan offer can run to many pages, much of it standard legal wording. A handful of sections, though, genuinely change what the facility will cost and what happens if circumstances change, and those are worth reading carefully every time.

Summary

• Always find the total amount repayable, not just the headline rate, before comparing or accepting an offer.
• Check how early repayment is treated, since this varies enormously between lenders.
• Understand exactly what security and personal guarantees are being asked for, and from whom.
• Look for covenants, ongoing conditions you must keep meeting, and what happens if you breach one.

Start with the total cost

Before anything else, locate the total amount repayable over the full term, in pounds. This single figure, more than any rate or factor, tells you what the facility actually costs. Our guide to understanding APR, factor rates and total cost of credit explains why a headline rate alone can be misleading.

Fees, and where they sit

List every fee mentioned: arrangement fees, completion fees, valuation fees, legal fees, renewal fees, and any broker fee. Check whether each is deducted from the amount you receive, meaning you get less than the facility amount upfront, or added to what you repay. A £50,000 loan with a 3% arrangement fee deducted at drawdown means you actually receive £48,500, which matters if you need the full £50,000 for a specific purpose.

Early repayment terms

This is one of the most commonly overlooked sections, and one of the most consequential if your plans change. Some lenders charge interest only up to the date you actually repay, meaning early repayment saves you money. Others charge a fixed total cost regardless of when you repay, so clearing the balance early does not reduce what you owe. Some charge a specific early repayment fee, often a percentage of the outstanding balance, as a separate charge on top. Know which applies before you sign, particularly if there is any realistic chance you might want to refinance, sell the business, or repay early from a cash windfall.

Security: what is actually being charged

Read carefully what security the lender is taking. This might be a fixed charge over a specific named asset, such as a property or piece of equipment, a floating charge or debenture over the company's assets generally, which can still apply even on a loan marketed as "unsecured", or a personal guarantee from one or more directors, making them personally liable if the company cannot repay. Our guide to personal guarantees covers this in more detail. Check specifically who is being asked to guarantee, for how much, and whether it is joint and several between multiple directors, meaning any one of them could be pursued for the full amount.

Covenants: the ongoing conditions

A covenant is a condition you agree to keep meeting throughout the life of the facility, not just at the point you take it out. Common examples include maintaining a minimum level of turnover or a specific financial ratio, providing regular management accounts or bank statements to the lender, not taking on further borrowing above a certain level without the lender's consent, and maintaining adequate insurance over any secured asset. Breaching a covenant can allow the lender to demand repayment in full, even if you have never missed a scheduled repayment, so understand exactly what you are committing to maintain, and whether it is realistic.

Events of default

Related to covenants, this section sets out what triggers the lender's right to demand immediate repayment or take enforcement action. Beyond missed payments, this often includes breaching a covenant, a material change in the business such as a change of control or insolvency event, and sometimes cross-default clauses, where defaulting on a different, unrelated facility can trigger default on this one too.

Variable elements

If the rate is variable or tracks a base rate, check how and when it can change, and whether there is any cap. If repayments are collected as a percentage of income, such as with revenue-based finance, check exactly how that percentage is calculated and whether there is a minimum repayment regardless of trading.

Who can change the terms, and how

Some facilities, particularly revolving ones like invoice finance or business credit cards, allow the lender to review and adjust limits, rates or terms periodically. Check what notice you are entitled to and what your options are if terms change in a way that does not suit the business.

A short checklist before signing

• Total amount repayable in pounds, not just the rate.
• Every fee, and whether it is deducted or added.
• Early repayment terms, including any specific fee.
• Exactly what security and personal guarantees are required, and from whom.
• Any covenants and what breaching one triggers.
• Whether the rate or repayments are fixed or can vary.

If anything is unclear

A reputable lender or broker should be able to explain any clause in plain English before you sign. If something is not clear, ask before committing rather than after. Lending Box talks offers through with clients as part of every application we support, since we are paid by the lender once a facility completes and have every incentive to make sure you understand exactly what you are agreeing to.