What every independent school needs to know about term loans
Having worked with independent schools over the last 10 years and supported hundreds of millions of term funding, there are a number of areas of consideration not all schools are aware of.
As a School, you may wish to fund larger projects over periods of time that many banks aren’t comfortable with.
As such, that £10m funding you need to profile over a 20 or 25 year term can quite easily put your school at significant risk if all avenues are not considered fully.
If you do wish to fund over a longer term (20 years for example), Banks will usually offer you a 5-year term over a 20 year payment profile.
This means (on a capital and interest repayment method) your payment is designed to fully clear your debt over the 20 years but the bank will renegotiate the loan after 5 years.
The challenge with this is that the bank has only committed to lend you the money for the first 5 years, as such, you can also only look to manage interest rate risk for the term of the facility (in this case, 5 years).
The consequences? During the 5th year, you will need to spend time and resources renegotiating the loan with your existing (or a different) bank. There will be a further arrangement fee to pay, a new loan margin to negotiate and the underlying interest rate environment will likely have changed potentially increasing your total loan costs.
Whilst this may not be a challenge for all schools, it is worth remembering that a Bank's appetite to lend to certain sectors can vary, and as such, your existing bank may want an increased margin to renegotiate your loan. In more extreme cases, your bank may not wish to continue the loan at all requiring you to seek the funding from alternative sources.
This has the potential to leave you in a position where you need to renegotiate the debt but no bank is prepared to do so, leaving your school insolvent if it doesn’t have the funds to repay.
If certainty of the longer term committed funding and/or the ability to manage your interest rate exposure over the longer term is important, then you should ensure this is part of your (or your Banking Consultant’s) tendering process.
Fixed or Variable?
With rates close to historic lows, it is sensible to fully explore the potential impacts of fixing interest rates on term loans. It is possible to fix the interest rate on all or part of your loan for a period up to or to match your loan term. Whilst this can give you security of knowledge that your interest rate won’t fluctuate, you need to fully understand the potential impact of break costs should you repay the loan early.
Should you be looking at new term lending, you should seek support and guidance from a banking professional (independent of the banks you are considering). The initial discussions and advice are normally free of charge.
Ian is Director of ‘The Education Banking Consultancy’ and has 20 years experience working with independent schools.
Do call Ian on 07796 940193 or email on firstname.lastname@example.org and he will be happy to talk through your £1m+ lending needs without cosy or obligation.