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Could the Coronavirus Lockdown Affect Your Business Loan?

on Tuesday, 31 March 2020.

The coronavirus (COVID-19) and the associated restrictions on travel and other activities are having a serious detrimental effect on many UK businesses.

It is likely that your turnover, profits and net assets could all be materially decreasing as UK economic activity slows down, even if your industry or sector has not been subject to a full shutdown.

If your business has funding by way of a bank loan or other financial facility, then now is the time to look carefully at the terms of your borrowing to see what risks there are and how you can swiftly move to mitigate them.

What Are the Potential Issues?

First and foremost, if your cashflow is drying up, there is the risk that you will not be able to make a scheduled repayment of capital or interest when it is due. This would almost certainly put you in default under the terms of your facility, and risk the bank looking to enforce security (and sell off your assets) or call on personal guarantees to cover the shortfall.

However, even if it has not come to that yet, the loan agreement may well include ongoing financial covenants and warranties - these are assurances that you are giving the bank on a regular basis as to the financial position of your business. They are likely to cover such things as your income, solvency and net asset value - a material adverse change to any of these could be sufficient to put you in breach of the terms. If that is the case then again it gives the bank the right to declare a default and take necessary actions to recover its money mentioned above that you would almost certainly want to avoid.

What Should You Be Doing?

The first step is to have a careful read of your finance documents (the loan agreement or other facility, and any security documents such as debentures, legal charges and guarantees) to see exactly what terms you are subject to, so as to make an accurate assessment of whether you have breached (or are likely to breach) any of the terms.

It may be that the documents provide a grace period for you to cure any breach, allowing you to look into other sources of funding, whether that is from private investment, or one of the government's new schemes to assist businesses affected by the coronavirus, but you will need to be very conscious of the time allowed.

In either case, if you are in difficulties, it may well be sensible to speak to your bank directly to see if you can agree a waiver or variation of the relevant terms to allow you to trade through this difficult period and extend or amend your repayment terms without a default being declared. Banks are now under instruction not to profiteer and to try and help businesses that are struggling, so they ought to be ready to engage constructively with you.

Coronavirus Legal Advice

How Can We Help You?

Our teams of specialist lawyers have years of practical experience in all of these areas and our banking, corporate finance and restructuring experts can:

  • review and confirm to you the current terms of your borrowing;
  • advise you on your duties as a director in times of financial difficulty;
  • help you approach and renegotiate with your bank or other lender;
  • give you advice and support when assessing the terms of alternative borrowing, so that you can understand and manage the process as efficiently and effectively as possible.

For advice or assistance with your business loan, please contact Richard Phillips on 07803 295 150, Emma Cameron on 07939 261 632 or Paul Heath on 07818 599 467 in our Corporate Law team, or complete the form below.

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