Are Minimum Terms Redundant?

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 RW Capital, 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.