How most-favored-lender clauses work

A most-favored-lender clause (often called an MFL clause) ties one borrower’s deal to future deals a lender makes. If the lender later grants better interest rates, fees, covenants, security, or other economic terms to another party, the borrower with the MFL clause can require the lender to extend the same improved terms to their loan. In my practice advising small businesses and startups, I’ve seen MFL clauses used to maintain competitiveness when markets move quickly or when lenders offer preferential terms to strategic borrowers.

MFL clauses vary by scope and trigger mechanics. Typical components include:

  • Scope: What part of the loan is covered — price (rate/fees), structure (warrants, covenant relief), or both. A narrow clause might cover only interest rates; a broad one includes any more favorable term the lender offers to others.
  • Trigger: Whether the clause is triggered by any better deal the lender offers, or only by deals that meet defined comparability tests (size, industry, loan type).
  • Timing and retroactivity: Whether adjustments are retroactive to the original loan date or prospective only, and how long the MFL protection lasts (e.g., 12–36 months after closing).
  • Proof and notice: The process for proving the lender offered better terms and the notification/adjustment mechanics.

A typical real-world trigger looks like this: if Lender A gives Borrower B a 50-basis-point lower margin than your loan on materially similar terms, then within X days you may elect to have your margin reduced to match, subject to any carve-outs.

Common forms of MFL clauses

  • Price-based MFN: Matches interest rate, margin, or upfront fees.
  • Structural MFN: Matches non-interest terms such as equity kickers (warrants), covenant relaxations, prepayment rights, or security package improvements.
  • Hybrid: Combines price and structural protections but often includes thresholds (e.g., only applies if the competing loan is within ±25% of principal amount).

Why lenders include or resist MFL clauses

Lenders sometimes accept MFNs to win competitive deals, especially with repeat borrowers or high-quality credits. For borrowers, MFNs reduce the risk of being left with inferior economics if the lender improves terms for a later client. Lenders resist broad, indefinite MFNs because they can limit pricing flexibility and require administrative burdens (tracking comparable deals, proving comparability, and implementing adjustments).

Practical examples and pitfalls

Example: A growth-stage company signs a $5M loan with a 6% margin and an MFL clause. Six months later, the lender offers a $10M competitor the same product at a 5% margin. With a properly drafted MFL clause, the $5M borrower can demand parity, saving 100 basis points on margin going forward.

Important pitfalls to avoid:

  • Overly broad comparability tests. If the clause applies to any loan the lender ever makes, you may qualify for adjustments tied to loans that aren’t truly comparable (different currency, term, or collateral).
  • Retroactivity. An MFL that requires retroactive refunds or re-amortizations can create accounting and compliance headaches for lenders — and complex computations for you.
  • Confidentiality limits. Lenders often resist disclosing other clients’ terms; insist on a reasonable proof/verification process (e.g., redacted term sheets or lender certification) rather than wide-ranging discovery rights.
  • Carve-outs. Lenders may carve out promotional offers, affiliate deals, or portfolio restructurings. Be sure those carve-outs are narrow and reasonable.

Negotiation strategies borrowers should use

  1. Narrow the comparability window. Tie the MFL to deals within defined ranges (loan size, maturity, business sector) so unrelated deals don’t trigger adjustments.
  2. Limit duration. Seek a finite protection period (commonly 12–36 months) instead of an open‑ended right.
  3. Define which terms qualify. If your priority is price, limit the clause to interest rate and fees rather than structural protections you don’t need.
  4. Add materiality thresholds. Require a meaningful difference (for example, at least 25 basis points for rates) before the clause triggers.
  5. Require lender notice and define proof. Specify how the lender must notify you and what documentation constitutes proof of a better deal — avoid litigation-prone open standards.
  6. Include a cap or floor. A cap prevents unlimited downward adjustments that could unsettle your accounting; a floor keeps margin above a minimum level.
  7. Sunset at refinancing or sale. Ensure the MFL ends if you refinance the loan or at a change-of-control event.
  8. Use sample computation language. Include a short, precise formula for recalculating payments to avoid later disputes.

Working with counsel and your CFO ensures the clause is practical and enforceable.

Drafting checklist (practical)

  • Define “comparable” loans: size, maturity, collateral, currency, and borrower industry.
  • State exactly which terms are covered (interest, fees, covenants, warrants).
  • Set a limited term for the MFN right (e.g., 18 months post-closing).
  • Include a materiality threshold and notice requirements.
  • Specify remedial mechanics and whether adjustments are retroactive.
  • Add confidentiality protections and limit discovery demands.
  • Consider caps or floors and termination events like refinancing.

Who typically gets MFN clauses?

MFNs are common in commercial loans, venture debt, private credit, and equipment financing where borrowers have leverage or repeat relationships. Startups and growth companies often request MFNs to avoid being disadvantaged if a lender later offers sweeter economics to a better-connected competitor.

For more on negotiating loan contract terms and covenants, see our Loan Covenant Negotiation Playbook for Growing Startups (https://finhelp.io/glossary/loan-covenant-negotiation-playbook-for-growing-startups/) and our primer on Loan Covenants Explained: Financial vs Positive Covenants (https://finhelp.io/glossary/loan-covenants-explained-financial-vs-positive-covenants/). For quick definitions of common covenant terms you’ll see alongside MFNs, read Loan Covenants: Key Terms Every Borrower Should Know (https://finhelp.io/glossary/loan-covenants-key-terms-every-borrower-should-know/).

Common misconceptions

  • “It guarantees identical terms for life.” Not usually. Most MFNs have time limits, comparability tests, and carve-outs.
  • “It’s only about interest rates.” Many MFNs also cover covenant relief, collateral changes, or equity kickers.
  • “Asking for an MFN will scare off lenders.” In my experience, reasonable MFNs are a normal part of negotiation; lenders accept them when the borrower is strategic or the deal is competitive.

Frequently asked questions

  • How long should an MFL clause last? Typical ranges are 12–36 months. The right length depends on how quickly you expect market terms to change and how long you need protection.

  • Can an MFN be enforced if the lender refuses to disclose other borrowers’ terms? Well-drafted MFNs include proof mechanisms (redacted term sheets, lender certification) to avoid deadlocks. If a lender refuses, you may need dispute resolution as specified in the agreement.

  • Are there legal risks with MFNs? In most lending contexts MFNs are contract tools and enforceable. However, in other industries MFNs have raised antitrust scrutiny when used to lock in buyers or foreclose competition; that’s uncommon in standard bilateral commercial lending.

Practical next steps

  • Ask for a draft clause early in term sheets so you can negotiate mechanics, not just the headline right.
  • Run the clause by outside counsel and your finance team to test operational and accounting impacts.
  • Track any lender notices and keep written records of communications and adjustments.

Sources and further reading

Professional disclaimer

This article is educational and based on my professional experience advising business borrowers. It does not constitute legal or personalized financial advice. For advice tailored to your situation, consult a licensed attorney or financial advisor.