26th July 2019 /
debt management

Are minimum terms redundant in 2019?

In the non-bank lending space, it’s commonplace in the negotiation of loan contract terms for the borrower to focus first on negotiating down the interest rate, and then on negotiating down the length of the minimum term.

Our observation is that it’s surprising that minimum terms lengths are the borrower’s second most salient negotiation points when, in practice, borrowers almost always seek an extension to their loan repayment term.

Borrowers and their non-bank lenders like White & Partners will spend a significant portion of the contract negotiations deliberating on minimum terms; the period within which the borrower cannot repay the loan which ensures the lender gets a minimum return.

Yet, our experience shows that this is a moot negotiation. A waste of energy, you might say. The borrower, optimistic in their intention to repay in a short timeframe, will aim to reduce their minimum term. Inevitably, hurdles from construction through to credit availability, and legislative factors such as changes in foreign investor rules end up hindering this quick repayment ambition, and more often than not the borrower will seek an extension, or refinance. Either way, the borrower invariably ends up paying the minimum term.

Whilst it’s human nature to seek the cheapest, quickest way out of the facility by negotiating a shorter minimum term, the focus should be on the long term loan deal, given the odds are that the loan term will be extended.