After supplying a huge amount of information, answering countless questions and signing a whole bunch of documents ('know your client'), the offer is finally there. It is tempting to sign as quickly as possible. The choice for the best offer is usually made on the basis of the interest rate, the arrangement fee and any additional costs. In the latter category, the commitment fee stands out. This commission is charged on the unused part of the credit. The charges are expressed as a percentage that can quickly reach 1% per year. Similar to this is the credit commission. This is charged on the part of the actual credit usage in a period. It makes a big difference whether this is calculated on the average credit utilisation or -as we often see- on the highest credit utilisation in a period. Credit commission can be charged on a monthly, quarterly or annual basis. Again, this commission can be as much as 1% per year. This may not seem like a lot, but at current interest rates, it quickly increases the cost from 20% to 25% per year. On a €1 million loan, that quickly saves around €10,000 a year! It is therefore a good idea to look not only at the debit interest rate but also at the additional interest rate components.
It's not just about cost
However, a financing offer is not only about costs, but also about terms and conditions. First of all, these are the collateral. Working capital financing often involves pledging stocks and debtors. A bank will also require business inventories and real estate as collateral out of convenience. It is good to negotiate this. If the bank waives this then these assets can be used as security for other, additional financing and the company is also less dependent on its banker. Other securities that should not be considered too easily are the liability of the holding company and other group companies and certainly personal guarantees. When entering into the agreement, this may seem like a small thing, but when the results are a few years down the line, this can have major unwanted consequences. So here too: don't just accept.
Additional agreements
Before you sign the financing agreement, there is one last thing to consider. The covenants. These are additional financial agreements or targets that your company must meet. These can be to do with the results, with the balance sheet position or a combination of both. An example of the first kind is a minimum EBITDA, or operating profit before interest, taxes and depreciation. Another is the Debt Service Coverage Rating: to what extent can the company meet its interest and repayment obligations from operating cash flow. An example of a balance sheet covenant is minimum solvency. The Net Debt/EBITDA commonly used by banks. This is the ratio of gross operating income to the balance of interest-bearing liabilities. It should often not exceed 4.
Review
The covenants are usually reviewed once a year based on the final financial statements. If a company fails to meet the agreed covenants at any time, it is in 'default'. This is a contractual ground for termination by the lender. Usually, it does not come to this the first time. However, a bank will not simply step over it. After all, it also faces supervision from DNB (Basel 3). If the situation is temporary, the bank will issue a so-called 'waiver' by which it temporarily tolerates the situation. This may include conditions, such as a ban on dividend payments or investments. There may also be costs associated with granting a waiver, which can amount to as much as €25,000. An additional problem may be that the auditor refuses to adopt the annual accounts for as long as the bank has not issued the waiver. When a waiver has been provided, the auditor will make a comment in the financial statements. If the covenants are not met for an extended period of time, the company may be placed under Special Management and the debit interest rate is often increased. Eventually, this situation can lead to the actual cancellation of the credit and the end of the business. As a business owner, it will be clear that you need to think carefully about the (additional) terms and conditions of a credit agreement before signing. This is to avoid problems in the future.
