RBC Royal Bank — $500K operating line + term loan (Sample)
Plain-English read
This sample reviews a commercial-banking facility letter for an Ontario manufacturing business: a $250K operating line of credit secured by a General Security Agreement, a $250K term loan secured by specific equipment, and an unlimited joint-and-several personal guarantee from the two owners. The headline interest rate is competitive. The structural terms are not.
The most consequential terms are a demand feature that lets the bank call the entire facility on notice without cause, a Material Adverse Change clause that turns soft macro signals into a default trigger, financial covenants tested quarterly with no cure period, and a personal guarantee that captures both the business owners and their spouses. Together these mean the bank holds the steering wheel even when payments are current and the business is running normally.
This report flags four items as red flags, lists ten specific questions to put to the lender in writing before signing, and recommends a focused legal review of three sections rather than the entire facility letter.
What is going to crack under load
The operating line is repayable on demand. The bank can require full repayment at any time, with or without cause, on as little as the notice required under section 244 of the Bankruptcy and Insolvency Act (10 days for an individual, varies for corporations). This is standard in Canadian commercial lending, but most SMB owners do not realize it. A relationship manager turnover, a minor covenant breach, or a sector-wide concern can trigger a call. Plan your cash position assuming the line could be pulled on 30 days' notice.
The MAC clause defines default to include any event that, in the bank's sole and reasonable opinion, materially adversely affects the borrower's business, financial condition, or ability to repay. There is no objective threshold, no cure period, and no third-party determination. Sector concerns, a soft quarter, or a public news event about a major customer can each be cited. The clause exists to give the bank discretion; it should be negotiated to require a quantifiable trigger or a reasonableness standard.
The personal guarantees from the two owners are unlimited (no dollar cap), joint and several, and survive termination of the facility. The Independent Legal Advice (ILA) provision is correctly drafted, but the bank also requires a spousal acknowledgement and consent for any personal real-estate collateral. Effectively, the $500K business facility puts both owners' personal balance sheets, their homes, and their spouses' positions at risk. Negotiate a dollar cap, time-limited guarantees, or postponement claim arrangements.
The facility requires the borrower to maintain a minimum Debt Service Coverage Ratio of 1.25x and a maximum Funded Debt to EBITDA of 3.0x, tested quarterly. Breach is an immediate event of default — there is no cure period, no requirement of notice before default, and no carve-out for one-time non-cash items. A single tough quarter can trigger default, which in turn triggers the demand feature and cross-default to other facilities. Negotiate at minimum a 30-day cure period and an annual averaging mechanism.
Obligation breakdown across the term
Headline rates of Prime + 1.50% to + 1.75% are reasonable for the segment, but the carrying cost is not the risk. The risk lives in the demand feature, the MAC clause, the unlimited personal guarantees, and the no-cure financial covenants. Treat this as a relationship facility, not a contractual one — the bank can change the terms or call the loan with limited notice.
Put these in writing before signing
- Q01Will you cap the personal guarantee at a fixed dollar amount, ideally tied to the facility size, with a release mechanism if the loan-to-value drops below a threshold?
- Q02Can the MAC clause require a quantifiable trigger — a specific drop in revenue or EBITDA over a defined period — rather than the bank's sole opinion?
- Q03Will you provide a 30-day cure period on financial covenant breaches, and use trailing-twelve-month averages instead of single-quarter snapshots?
- Q04Can the demand feature be removed in favour of a committed-term facility, even if at a slightly higher spread, so we have predictable access to capital?
- Q05What is the bank's policy on relationship-manager turnover affecting the facility? Can we get a senior credit officer assigned as a backup?
- Q06Will you confirm in writing that prepayment of the term loan beyond the 10% allowance is penalty-free in the event of a sale of the business or refinance to another bank within the same financial group?
- Q07Can we get the spousal acknowledgement requirement removed if no personal real-estate collateral is taken?
- Q08What documentation, in what timing, will trigger a covenant review meeting versus an event of default?
- Q09Will the facility be cross-defaulted with our other banking relationships, or limited to facilities at this institution?
- Q10Can we get a written list of all reporting requirements (monthly statements, quarterly compliance certificates, annual reviewed financials) so we can budget the accounting cost of the relationship?
What to do next
- 01Bring this report to a qualified Canadian commercial banking lawyer for a focused review of §3, §6, and §9.
- 02Get an Independent Legal Advice (ILA) certificate for each guarantor before signing — separate from the bank's lawyer.
- 03Build a 24-month cash-flow model that stress-tests the demand feature: assume the line is called with 30 days' notice in month 13.
- 04Document and disclose all existing facilities at other institutions — undisclosed debt is itself a default event.
- 05Do not sign without the personal guarantees being addressed in writing. Engage banking counsel before signing.
General business and document analysis only. Not legal, financial, or investment advice. Always consult qualified counsel before signing.