In these times of economic hardship it can be particularly difficult for businesses to get loans from their bank. Even if they do there are certain conditions in these contracts that they should be aware of and the CBRE has recently issued guidance that companies should be very careful to check all of the conditions before signing for a loan.
Recent research by the CBRE showed that there can be hidden fees in a loan agreement which can be very expensive under certain conditions. For example, some loan agreements were found to contain a clause that meant the borrower had to pay a fine of 20 percent of the value of the loan if they cancelled it.
The issue is really to do with something called swap insurance contracts. This is something that many businesses were taking out in 2007 when there was a concern about the rising cost of loans through interest rates. The insurance contracts became appealing and were a good business tool for controlling risk. Because they were appealing many businesses took out these loans for a longer time than was necessary.
Now, when interest rates are low, businesses are wanting to swap these items over to traditional loans, however the cost of doing so can sometimes be massive, and businesses were generally unaware of this when they signed up before the economic recession began.
Many people, and certainly the lenders, will argue that this is a case of caveat emptor. Businesses should be more careful and should take adequate precautions before signing a loan agreement. Unfortunately, many of these loan agreements were so complex that many businesses simply couldn’t understand them. The question will be should businesses be punished for not looking into it properly. If some relief is not given to businesses then the consequences for them will be significant.