Why Structure Matters More Than the Headline Rate

When borrowers compare finance options, the headline interest rate is almost always the first point of comparison. This is understandable — the rate directly affects the cost of the facility. However, for complex or substantial transactions, focusing primarily on the rate can lead to poor outcomes. The overall structure of the facility often has a greater impact on the borrower's position than a marginal rate difference.

Facility terms encompass far more than the interest rate. Repayment structure (interest-only versus capital and interest, bullet repayment versus amortisation), term length, early repayment provisions and drawdown flexibility all affect the practical cost and utility of the facility. A facility at a lower rate but with restrictive prepayment penalties and inflexible drawdown terms may prove more expensive and less useful than a slightly higher-rate facility with greater flexibility.

Covenants are another area where structure matters considerably. Financial covenants — such as debt service coverage ratios, loan-to-value maintenance tests and minimum net worth requirements — create ongoing obligations that the borrower must satisfy throughout the facility term. Breaching a covenant can trigger default provisions, even if the borrower is meeting all payment obligations. Understanding and negotiating appropriate covenant levels is a critical part of deal structuring.

Security requirements also vary significantly between lenders and can affect the borrower's overall position. Some lenders require personal guarantees, cross-collateralisation across multiple assets, or debentures over the entire business. Others take a more proportionate approach to security. The security package affects the borrower's flexibility to raise additional finance, dispose of assets or restructure their affairs during the facility term.

An experienced finance advisor considers all these structural elements holistically, not just the headline rate. The objective is to secure a facility that is appropriately priced, suitably structured and practically workable for the borrower's specific commercial situation.