‘Term Loans’ are a topical subject – particularly if you thought that you had one and it now seems that you don’t! Basically a Term Loan is a loan that both you and the lender (normally a bank) intended to run to its original term – normally a period (say 15 years).
The loan is carefully documented in a Facility Letter, which sets out interest rates, fees, monthly repayments etc – plus all the small print.
In the small print it will set out that neither party can change the deal without the consent of the other – unless the borrower is in ‘default’ which ‘breaks’ the deal (or allows the bank to ‘break it’ if it so chooses).
The benefit of a Term Loan in the current climate is that the bank cannot pull out of it at a time when they are trying to recover capital by ‘managing out’ loans that they may prefer not to have on the books.
However it is possible that you may have technically defaulted on such a loan in the past – perhaps without realising it. Before ‘Humpty fell off the wall’ for example, several banks were keen to arrest the slow decline in their lending and one tactic was to offer existing borrowers a ‘repayment holiday’ on their loans. Many businesses will have been grateful for that – it helped with cash flow. Alternatively they may have been given a ‘top up’ loan or allowed to ‘redraw’ an amount. All these were positive and helpful offers – however they could now be a means by which a bank could claim that you have ‘broken’ the untouchable terms of the original loan and made it eligible for a ‘manage out’ exercise.
The morale is that if you have a Term Loan – don’t fiddle with it! If you thought you had one but the bank now says that you don’t – get help.