A facility agreement is also known as a loan agreement.
A facility agreement is a very complex document that can protect the two parties involved – borrower and lender, although more often than not the protections are for the lender. In most cases, the lender creates the loan agreement – meaning that the administration and liability (including all of the terms for the agreement) falls on the lending party. The purpose of such an agreement is to specify what is being loaned and when the borrower has to pay it back – as well as how.
In the agreement, there are specific terms that detail exactly what is given and what is expected in return. Once it has been executed, it is essentially a promise to pay from the lender to the borrower.
Even if you think you may not need a facility agreement with a friend or family member, it is always a good idea to have it in place, just to make sure there are no issues or disagreements over the terms later that could ruin a valuable relationship.
The Specifics of a Facility Agreement
A facility agreement can be divided into four sections:
- Interpretation/definitions: defines some of the terms which will be used elsewhere in the document.
- Mechanical: sets out the operational terms of the agreement such as the amount being borrowed, repayment schedule and interest. This is the section which the finance director or treasury team of the borrower will pay considerable attention to.
- Transaction: contains the terms and conditions of the agreement including what each party must provide, their responsibilities to each other, what happens if the borrower defaults on the loan and the extent to which the parties to the agreement may change. This is the section which the lender and borrower will spend most time negotiating.
- Boilerplate: Relatively standard clauses setting out the contract details of the parties, the relationship between the finance parties if there is more than one tender and law which governs the agreement.
When acting for the lender, we’re looking to ensure that any conditions precedent are complied with pre-drawdown and any conditions subsequent are dealt with by the borrower.
Some questions to consider as a lender or borrower will be:
- How much is the principal facility amount?
- Is it drawn down in one lump only or multiple draw downs as required by borrower?
- What security if any is there?
- What are the conditions precedent to drawdown?
- What is the interest and how is it to be calculated and paid?
- What about default interest?
- What will be ‘events of default’?
- Can the loan be prepaid (that is paid early)?
- What is the term of the loan and what happens on repayment?
- Who is paying fees costs and expenses? (Usually the borrower)
- What representations and warranties are made by the borrower?
Benefits of a Well-Drafted Facility Agreement
A carefully crafted facility agreement offers several advantages:
- Legal Protection: It provides a legally binding document that can be enforced in court if necessary. If you’re a lender and are taking security, we can also do the legal due diligence on the security if it is property.
- Clarity of Terms: It eliminates ambiguity by clearly stating all loan terms. Clarity reduces the risk of misunderstandings or disputes and provides peace of mind.
- Risk Management: By outlining default scenarios and remedies, it helps both parties manage potential risks associated with the loan.
- Flexibility: It can be tailored to accommodate specific needs of the borrower or unique aspects of the loan.
- Compliance: It ensures that the loan arrangement complies with relevant laws and regulations.
By including these key components and understanding their benefits, both lenders and borrowers can ensure that their facility agreement serves as a comprehensive and effective legal instrument for their loan transaction.
Get Support with Your Facilities Agreement
As a solicitor, I draft many loan agreements and facility agreements each year for different types of businesses. Recently, we’ve been involved in:
- Loan of circa £150k to a property developer, including loan, personal guarantee and security.
- Acting for Ambur Capital on a number of development projects including this one with my commercial property partner John McLean
Enlisting my services for your loan agreement ensures:
- Plain English Advice
- Time – to understand your situation and all that you’re faced with.
- Experience – effective advice on many different forms of loan agreements including loans to family or friends, bank loans, corporate and business loans, secured or unsecured loans, structured loans, disputes over loan agreements, employee loans and director loans.
- Cost – fixed fees on all matters for your certainty.
- Convenience – meetings by phone, video call, or in person at a time to suit you.
Get in touch with me for any questions you might have about drafting a loan agreement – I’ll be delighted to help you protect your business with a facilities agreement.