Lending covenants on property loans– do you know your options?

With interest rates set to be high for some time to come, the cost of borrowing for UK businesses is rising. This can mean an increased risk of breaching lending covenants on property related loans particularly for those borrowers on a variable rate facility.

In addition, those on fixed rates should be considering when their facilities are due for review/renewal and be prepared for a higher cost to borrow and/or a reduction in the borrowing facility that can be provided. Lenders will be stress testing your management information and asking more questions to ascertain the available headroom to deal with further rate rises and/or rental income reducing.

Banks are left facing a difficult decision when a borrower is close too or breaking its lending covenants. They cannot simply ignore it, nor are they likely to panic demanding a review of the business’s performance. A positive, working relationship with your banking partner will most likely determine next steps. It is here that a business will discover whether its bank is the ‘trusted adviser’ it claims to be. Banks will show empathy where a positive and knowledgeable relationship exists and may suggest remedies to address any challenges. This might include capital repayment holidays; loan term extensions, or simply agree a relaxation in the covenant levels for several months.

If the lender cannot see a way to support the business, there are still plenty of active property finance providers keen to work with developers/investors with a good track record. Seeking advice early is often critical to achieving a positive outcome.

For information on how a business should respond to breaching covenants read our article here.

If you have any questions or would be interested in further guidance, please contact us today. We can provide more detail on this subject and walk you through the services we provide and how they can help.