Most schools operate some form of debt facilities with a bank or financial institution. It may be an overdraft for working capital purposes, revolving credit facility for the acquisition of new property or the development of new facilities, or asset financing of new equipment.

In each of these cases, discussions with the bank will result in a term sheet (also known as 'heads of terms' or 'outline terms and conditions'), which sets out the principal terms on which the bank is prepared to finance the school’s debt requirements. Term sheets are generally non-binding, and therefore parties sometimes focus on the 'cost of funds' before proceeding to the documentation stage without detailed consideration of the other terms. However, before embarking on a course of negotiation with a bank which results in an agreement of a term sheet, there are a few useful tips any school should consider in their discussions and negotiations with any potential funders.

Shop Around

A school should speak to more than one bank to get a feel for the market. Banks, in order to distinguish themselves, often operate in particular sectors such as, for example, education, healthcare, and leisure. Schools may find banks with an education sector focus more competitive since they are better positioned to understand them.

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Take Legal Advice at the Start of Your Negotiations

Early legal advice ensures that the structure of the facility best suits the school’s needs and reduces its risk exposure. Advice may also be required at an early stage on the proposed charging of property and the Charities Act 1993 requirements.

The Long Term Relationship

Some banks place more emphasis on 'relationship banking' than others. A truly productive and rewarding banking relationship is not just about cost of funds but whether the bank will understand and support the school. Also, once the financing has completed it is important to ask how the bank will now manage the ongoing relationship. In the long run if a school encounters a problem, or just needs some flexibility in its financing arrangements, it may find itself speaking to an individual who does not understand the sector and may not be as sympathetic as its original contact. Ensure you understand the process and are comfortable with the individuals involved.

Bank and Expert Fees

Paying off debt early can be beneficial to schools but there are often hefty prepayment or exit fees attached to any such payments. Therefore, it is always a good idea for a school to agree a prepayment clause to allow itself to refinance the debt at anytime, or pay it off early in certain circumstances if it so requires, with minimum or no penalties. If the loan interest is fixed (i.e. hedged whether by a swap or internally fixed) there may be break costs which it should be aware of and which it should clarify with the bank.

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A school should also discuss what other fees may be payable during the operation of the loan such as arrangement fees, commitment fees and non utilisation fees. Again, banks with a specific education focus may charge more competitive fees.

Also, it is advisable to check how often the bank can appoint valuers, accountants and other experts to review its business and assets since these fees will be generally paid for by the school and not the bank.

Default Interest

It is understandable that a bank may charge default interest in the event of any problems on a loan. Banks may charge anything up to 5% above their Base Rate or LIBOR (as the case may be) as a default rate. Banks are sometimes open to discussing the default rate at the outset of the deal and schools should take this opportunity to do so.

General, Financial and Information Covenants

A school should bear in mind that a loan agreement is a live document and as such must fit its business. Time should be taken to consider if it can comply with the general, financial and information covenants the bank is seeking for it to undertake. For example, information covenants may prove too burdensome for smaller schools and should be carefully reviewed. A breach of covenant should be taken seriously since it will constitute an event of default, allowing the bank to charge default rate interest and call in the loan. Furthermore if there is anything in a business plan or forecast that may breach financial covenants, e.g. proposed capital expenditure, then a school should ensure that it agrees suitable exceptions allowing it to comply with the covenants.

Security and Conditions Precedent

The less the better, but this is not always possible! The important point for a school to keep in mind is that whatever it has agreed to provide will be required at drawdown, and a failure to produce such documents could result in a delay.