Access to funding can create opportunities for growth, investment and resilience. However, agreeing to a new lending facility without fully understanding the business loan terms can leave you with unexpected costs, restrictive conditions or insufficient flexibility when circumstances change.
Whether you're refinancing existing borrowing, funding expansion plans or strengthening working capital, the right facility should support your business objectives, not create new constraints.
Before signing on the dotted line, here are five questions every business should ask.
1. What is the purpose of the borrowing?
It can be tempting to focus on the amount being offered or how quickly funds can be made available. However, the first question should always be whether the facility addresses the specific challenge your business is facing.
Are you looking to:
- Support short-term cash flow
- Fund capital investment
- Finance an acquisition
- Manage seasonal fluctuations
- Refinance existing debt
- Create additional headroom for future growth
Different funding solutions are designed for different purposes. A facility that works well for one objective may be less suitable for another.
Taking time to clearly define the purpose of the funding can help ensure you select a facility that is aligned with your commercial goals rather than simply accepting the most readily available option.
2. How much will the facility really cost?
The headline interest rate is only part of the picture. Lender and professional fees and charges can add up, so businesses should consider the total cost of borrowing, including:
- Arrangement fees
- Renewal fees
- Commitment fees
- Security costs
- Legal and professional costs
- Valuation fees (where applicable)
- Early repayment charges
The cheapest option on paper may not necessarily be the most cost-effective in practice.
It's also important to understand whether borrowing costs could increase in future if interest rates change or if the facility moves onto a different pricing structure.
Looking beyond the headline rate allows business owners to compare facilities on a like-for-like basis and make more informed decisions.
3. What financial covenants and conditions are attached?
Many lending facilities come with conditions that extend beyond making repayments on time. Some conditions will commonly be pre-lending conditions, which need to be satisfied before any funding is finalised. Whilst post-lending conditions are matters that need to be addressed, after the facility has been arranged but usually within a definitive time period i.e. within 3 months.
Lenders may require businesses to report on and maintain certain financial ratios, place restrictions on dividends being paid , or seek approval before undertaking specific transactions or making major investments. These requirements are often set out as financial covenants within the facility agreement.
While these requirements may seem manageable when performance is strong, they can become more challenging during periods of economic uncertainty or unexpected trading difficulties.
Understanding facility covenants in advance helps businesses assess whether they are realistic and sustainable over the life of the arrangement. Testing how much covenant headroom you would have if trading softened is a practical way to judge this.
Whilst covenants usually remain in place for the duration of the term of the finance, lenders may be willing to remove covenants or renegotiate after a period of covenant compliance, repayments regularly being met or continuous positive trading conditions.
4. Will the facility still work if circumstances change?
Business plans rarely unfold exactly as expected. Growth may happen faster than anticipated. Market conditions may change. Costs may increase. Opportunities may emerge that require additional investment.
A facility that meets today's needs but lacks flexibility could become a constraint in future.
Before agreeing to any arrangement, consider:
- How much additional capacity is available
- Whether limits can be increased if required, as they can with some revolving credit facilities
- How repayment structures align with future cash flow
- Whether the facility can adapt to changing business needs
Building flexibility into funding arrangements can help businesses avoid costly refinancing exercises later.
5. How will lenders view the business in 12 months' time?
Many funding decisions focus on the business as it stands today. However, lenders are often more interested in where the business is heading.
Before entering into a new facility, consider how future trading performance, investment plans, profitability and cash flow forecasts are likely to be perceived by lenders. A strong borrowing relationship is built on transparency, realistic forecasting and regular communication. A rolling 13-week cash flow forecast is one practical way to evidence this.
Businesses that understand how lenders assess risk are often better positioned to negotiate favourable terms and secure additional support when opportunities arise.
Funding should create headroom, not pressure
The right facility can provide the confidence to invest, expand and navigate uncertainty. The wrong one can restrict flexibility and create avoidable financial pressure.
Taking a step back to assess the purpose, cost, conditions and long-term suitability of a facility can help ensure funding supports your wider commercial objectives rather than simply solving an immediate need.
How Azets can help
Choosing the right funding structure involves more than comparing interest rates. It requires an understanding of your business strategy, cash flow requirements, growth plans and lender expectations.
Our Debt Advisory specialists work with businesses to assess funding requirements, review existing borrowing arrangements and explore a range of financing options. We can help you understand the true cost of funding, negotiate with lenders and ensure facilities are aligned with your long-term objectives.
Whether you're considering a new facility, refinancing existing debt or looking to improve financial headroom, we can help you make informed decisions with confidence. Get in touch with our team today.
