Business finance arrangements
Considering the potential impact COVID-19 could have, businesses are advised to review financing arrangements with their bank or any other provider. It is important that businesses of all sizes consider their rights and obligations in relation to any contracts that have been entered into.
In most financing arrangements the borrower will have been asked by the finance provider to give certain undertakings and covenants about, amongst other things, the level of ongoing contracts and associated income and expenditure. If a force majeure clause in a contract has been properly invoked by either party, this in itself may be sufficient to represent a breach of the financing agreement which could ultimately lead to the borrowing being called in. This would especially be the case where the contract that could not be performed was significant in the context of the borrower’s business.
A business may also find itself in breach of its covenants to the finance provider even if a force majeure clause isn’t invoked. Disruption to a business caused by the effects of COVID-19 in its marketplace might adversely affect its ability to comply with the terms of a finance agreement. This might be the case where inability to source reasonably priced goods could impact on the profitability of the business and its ability to comply with covenants given as to profitability or performance levels.
Some finance agreements contain a clause allowing the provider to take certain actions in the event of a material adverse change in the business, its profitability or performance. These actions might include calling in early repayment or ceasing any further lending or advances. Any failure by the business to fulfill the obligations in a contract with a third party could be a material adverse change as set out in the finance agreement. It may also be a breach of a covenant in the finance agreement.
In all the above circumstances, the potential action that the finance provider might take and the consequences for the business will depend on the exact wording of the relevant finance agreement. It is therefore essential that each business has a good understanding of the terms of the finance agreements that are in place. Even if it is not possible to avoid the adverse impact of COVID-19, having a good grasp of the covenants and other terms of the finance arrangements in place will put the business in a better position to understand and potentially protect its relationship with its finance provider.