A commercial loan annual review is the lender's scheduled look at your loan, set by a clause in the loan agreement. It checks the latest financials, the value of the property and whether the conditions of the loan are still being met.
Perhaps an email from your relationship manager has asked for this year's financials, a statement from each guarantor and a copy of a lease, with a date to send them by. Is something wrong with the loan? Could the bank change its terms? Is this a good time to see what other lenders would offer?
A scheduled review arrives because of a date in the agreement, not because something has happened. At Ardent Capital Group we can look at the review with you, and compare your loan with what other bank and non-bank lenders offer.
What a commercial loan annual review is
Many commercial loans give the lender the right to look at the loan again each year while it runs. A review compares the business, the property and the loan today with what was approved.
The review clause sits in the letter of offer or the facility agreement. These are the documents that set the terms of the loan when it was approved: the rate, the term, the security and the conditions the borrower agreed to keep meeting.
A review can confirm the loan as it is. It can also lead to new terms, which the lender sets out in writing.
The review and the expiry date are two different events
It helps to keep the review and the end of the loan apart in your mind. The expiry date, or term end, is the date the loan must be repaid or refinanced. The review is a check along the way, and the loan carries on after it.
A term loan does not roll on by itself when it reaches expiry. The lender decides whether to continue it, which is called a rollover or an extension. An extension does not have to be on the same terms. Where a review falls close to expiry, the two conversations can run together.
A request for information between reviews
A loan agreement can also let the lender ask for information outside the yearly schedule, for example after a change in the business or the property. You answer it in the same way as a scheduled review: read what the request lists, gather it, and raise any question about the date early.
What the bank usually asks for at a review
The request usually arrives as a list with a date. Each item on the list feeds one of the checks the review makes, and knowing which check it serves makes the list easier to work through.
A review commonly asks for some or all of these:
- The latest financial statements for the borrowing entity, and sometimes for related entities. These feed the income tests. Where the year's accounts are not finished, management accounts may be asked for instead. Management accounts are internal reports, such as a profit and loss and a balance sheet, prepared for the business's own management during the year.
- A statement of assets and liabilities from each borrower and guarantor. This is a list of what each person owns and owes. A guarantor is someone who agrees to repay the loan if the borrower cannot.
- Confirmation that tax lodgements are up to date. This can include recent business activity statements (BAS), the returns a business lodges with the ATO to report goods and services tax (GST) and other taxes. It can also include an ATO statement of account, which shows any tax balance owing.
- Leases and a rent roll where the property is let to tenants. A rent roll lists each tenant, their rent and their lease dates.
The lender may also order a revaluation, which is a new valuation of the property. The loan agreement says who pays for it.
The list may include something you do not have yet, such as an updated lease between your family trust and your operating company. Ask about it as soon as you see it, so there is time to have it prepared before the date.
What the review checks your figures against
Much of what the review looks at comes back to the conditions written into your loan agreement. These conditions are called covenants, and knowing yours takes a lot of the uncertainty out of the review.
A covenant is a condition in the loan agreement that the borrower's figures must keep meeting while the loan runs. Some covenants are financial tests, such as a minimum interest cover or a maximum loan to value ratio. Others are reporting conditions, such as sending the annual accounts by a set date.
The figure in each covenant differs from one loan to the next, so the numbers that apply to you are the ones in your own agreement. Our commercial finance glossary defines these and other loan terms in plain words.
Interest cover ratio (ICR)
Interest cover asks a simple question: does the income pay the interest with room to spare? The interest cover ratio, or ICR, divides net income by the interest charged on the loan over the same period.
For a property let to tenants, the income is the rent left once outgoings are paid, meaning running costs like council rates, insurance and repairs. For an owner-occupied property, the agreement says which business income counts.
Debt service cover ratio (DSCR)
Debt service cover takes a wider view, because it counts every repayment the business makes. The debt service cover ratio, or DSCR, is earnings before interest, tax, depreciation and amortisation, known as EBITDA, divided by the total of every repayment, principal and interest, on every loan.
Principal is the portion of each repayment that reduces the balance. Depreciation and amortisation are accounting charges for assets wearing out over time.
Loan to value ratio (LVR)
The LVR test is about the property rather than the income. The loan to value ratio is the loan as a percentage of the property's value, and the agreement can set a maximum.
When a revaluation moves the value, the LVR moves with it. A higher value lowers the LVR. A lower value raises it, even though the loan balance has not changed.
Reporting conditions
Not every covenant is a ratio. Reporting conditions set what the borrower sends and when: annual accounts, guarantor statements or confirmation that tax lodgements are current. These are the conditions most within your control.
Finding your own covenants
Your covenants are written down, even if you have not read them since the loan settled. They sit in the letter of offer or facility agreement, in a section with a heading such as covenants, undertakings or financial conditions.
Look for three things: each financial test and its figure, how often each test is measured, and the reporting dates. If a clause is hard to follow, your solicitor can explain what it means for your loan.
Working out your own interest cover
You can check your own interest cover before anything is sent. Doing the sum yourself means the result of that test holds no surprise.
- Take the net income for the year from your accounts, or the rent after outgoings for an investment property.
- Take the interest charged over the same year from your loan statements.
- Divide the income by the interest, and compare the result with the minimum in your agreement.
The agreement defines which income counts, and the definition may not match a single line in your accounts. Your accountant can help you match the definition to your figures. If the result sits close to the minimum, you have time to gather the context that explains it before the review date.
The revaluation, and properties valued with their business
A revaluation can feel out of your hands. Knowing how the valuer approaches your type of property makes it easier to prepare for.
A trading property such as a pub, motel, childcare centre or service station can be valued as a going concern. A going concern value includes the business's trading, so the trading figures move the value as well as the building does.
For one of these properties, the review's financials and the valuation are linked. Having current trading figures ready for the valuer, such as occupancy or sales reports, lets the valuer work from the business as it trades today.
When the property is let to a tenant
If you own the building as an investment, the tenant's rent is what pays the loan. The review then centres on the lease and the rent instead of a trading business.
The documents commonly asked for are the current lease, any variations or option notices, and the rent roll. The review may look at:
- The time left on each lease. For a building with several tenants this can be measured as the WALE, the weighted average lease expiry: how long the leases have left on average, with each lease weighted by its rent.
- The rent review method in each lease, such as fixed increases, CPI or market review. A rent review is the lease's own clause for changing the rent, and it is separate from the loan review.
- Interest cover on the rent after outgoings.
- Any vacancy, or a lease close to its end.
In property, a tenant's financial strength is often called its covenant. That is a valuation term, and it is separate from the covenants in your loan agreement. Our tenanted commercial refinance page explains how the lease shapes a loan on a leased investment property.
Preparing for the review
You control the preparation fully, and starting early takes the pressure off the date. Working in a set order helps:
- Read the request and note the date. List each document asked for and who holds it: you, your accountant, each guarantor or a managing agent.
- Find your loan agreement and note your covenants and reporting dates.
- Bring tax lodgements up to date first. Lodging an overdue BAS before sending anything means the ATO statement of account matches the rest of the documents.
- Ask your accountant for the year's accounts, or for management accounts if the tax return is still some way off.
- Ask each guarantor to prepare a statement of assets and liabilities.
- Check your own interest cover against the minimum in your agreement.
- Send everything together, with a short covering note.
When the year's accounts are not finished
A review date can arrive before your accountant has finished the year's accounts, especially where the accounts are prepared alongside the tax return. That gap can be managed.
Tell the bank early, and ask whether management accounts will do in the meantime. Your accounting software can produce a profit and loss and a balance sheet for the year so far, and these show where the business stands now. Your accountant can say when the final accounts will be ready, and that date can go in your covering note.
Guarantors and the other entities in your group
A review can reach beyond the company that borrowed. Where a family trust owns the property and a company runs the business, the review may ask for figures from both.
Each guarantor may be asked for a personal statement of assets and liabilities. A guarantor is commonly a director, and sometimes a spouse or partner as well. A copy of the current lease between the trust and the company may be asked for too.
Explaining a quieter year
A year with lower income can be explained, and figures explain it more clearly than general words. A short covering note can set out:
- what caused the change, such as a lost contract, a refurbishment that closed part of the business, or a one-off cost;
- what the figures show since the cause ended;
- this year's figures to date against the same months last year.
Your accountant prepares the figures. The note sets out, in plain words, what happened alongside them.
What can come back from a review
A review can end with the loan confirmed as it is, and a letter saying so. It can also bring changes, and knowing the possibilities ahead of time lets you plan for each one.
After a review, a lender may:
- leave the loan as it is;
- change the margin. The rate on a commercial loan is commonly the lender's base rate plus a margin, and a change to the margin is called repricing;
- add a condition, such as sending figures more often;
- ask for part of the loan to be repaid, or for extra security;
- adjust the limit on an overdraft;
- decide not to extend the loan when it reaches expiry.
Any new terms come in writing. That letter states what the loan now costs and what it requires, and it is the starting point for a comparison with other lenders.
A change may ask for something you would rather not give, such as your home as extra security. Ask what alternatives exist before agreeing, and compare what other lenders would offer.
Protections when your loan is with a bank
If your loan is with a bank, a set of industry rules may shape what happens after a review. The Banking Code of Practice applies to banks that subscribe to it, and to customers who meet its definitions, including its definition of a small business customer.
For a small business customer, the Code includes these protections:
- Where a loan will not be fully repaid by its regular repayments, a bank that decides not to extend it gives you notice at least three months before full repayment is due, provided you are not in default.
- Not providing financial information the agreement requires is listed as a default. Before acting on it, the bank gives notice and usually at least 30 days to fix it, where it can be fixed.
- The bank acts on that kind of default only where it is material.
- Standard form small business loan contracts do not include a default based on an unspecified material adverse change.
- The bank's process for external valuations must be fair and transparent, and the bank explains what a valuation is for.
The Banking Code of Practice sets out each protection in full. What a particular clause means for your own loan is a question for your solicitor. The Code does not apply to a loan with a non-bank lender, and the loan agreement sets out the terms.
Comparing your loan at review time
The review asks you to gather a year of financials, guarantor statements and the leases. Those are the same documents a refinance needs, so the review is a natural time to see how your loan compares.
Some lenders may offer more competitive rates and terms. A comparison with other bank and non-bank lenders shows how your current loan sits against them. A non-bank lender lends without a banking licence and does not take deposits from customers.
The rate on its own does not show whether a loan suits the business. A full comparison covers:
- The margin and the base rate it sits over.
- The fees, including any review fee. Some loans charge a fee at each annual review.
- The covenants: which tests apply and how each is measured.
- The reporting conditions: what must be sent, and when.
- The review clause: what a review under that loan asks for.
- The term, and when the loan would next need refinancing.
- The security: the property and any guarantees the loan is held against.
Where a lender will write your loan without an annual review, that becomes one more point to compare, alongside the rate and the fees. A lower rate with tighter reporting, or a longer term with a new fee, can change the answer. Setting each loan out on the same points shows what you would gain and what you would give up.
Your bank can be part of the comparison too. With a written offer from another lender in hand, you have a concrete figure to raise if you ask your bank to look at its margin. Our list of reasons business owners refinance a commercial property loan goes further into comparing the margin and the ongoing fees.
Timing a refinance around the review
Looking at other lenders does not mean setting the review aside. Your current loan stays in place until a refinance settles, so the review still needs answering by its date.
A refinance can be prepared while the review is open, using the same documents. Three dates shape the timing:
- The review date. Send what the bank has asked for on time, whatever else you are planning.
- The expiry date. Allowing three to six months ahead of expiry gives room for a new lender's valuation, its approval and settlement.
- The end of any fixed rate. A break cost is a fee for ending a fixed rate early. The more rates have fallen since the rate was fixed, the bigger it is. The loan documents set out how it is worked out, and we can work through it with you before you decide.
You do not need to tell your bank to start a comparison. It is told when you sign the authority for it to release the mortgage at settlement. Each step, the costs and the documents are set out in our step-by-step guide to refinancing a commercial property loan.
Common questions about annual reviews
Does an annual review mean my bank is worried about my loan?
A scheduled review comes from a date in your loan agreement, not from a concern about the business. It is the lender's yearly check of the loan, and it can confirm the loan as it is.
Can my bank change my rate at the review?
It can, where the loan agreement allows the margin to be reviewed. Any change comes in writing, and that letter gives you a clear starting point for comparing other lenders.
Who pays for a revaluation?
Your loan agreement says who pays. Check the fees section of the letter of offer, or ask the bank before the valuation is ordered.
What if I cannot send everything by the review date?
Contact the bank before the date, say what is outstanding and give a date for it. Sending what you have, with your accountant's date for the final accounts, keeps the review moving.
Is there a fee for an annual review?
Some loans charge one. Your letter of offer lists the ongoing fees, and a review fee is one of the costs to include when you compare lenders.
Can I refinance while the review is still open?
You can, subject to the new lender's assessment. The documents gathered for the review are much the same as those a refinance needs. The review still needs answering, because your loan stays with your bank until settlement.
Talk to us about your loan review
An annual review asks you to put a year of the business on paper. That same work shows whether the loan still suits the business you run today.
At Ardent Capital Group we can go through the review with you, and compare review conditions, covenants, fees and the rate across bank and non-bank lenders. We stay on after settlement, and we review the loan as the business changes. If a review letter has arrived and you are weighing up a commercial loan refinance, we would be glad to read it through with you.
