Why MFN clauses matter

Most Favored Nation (MFN) clauses are often small wording lines in a loan agreement but can meaningfully change the economics of borrowing. For borrowers—especially small businesses and startups—an MFN can reduce interest expense, lower fees, or trigger better covenant terms without reopening the loan. For lenders, MFNs protect pricing parity and may be limited to prevent adverse selection.

In my practice advising borrowers, I’ve seen MFNs save clients tens of thousands of dollars when market pricing moved quickly or when a lender selectively reduced pricing for a new customer. But an MFN only protects what the clause actually covers; imprecise drafting or broad carve-outs can render it ineffective.

(See further context on key agreement terms in our guide: Key Loan Agreement Clauses Every Borrower Should Know.)

How MFN clauses typically operate

An MFN clause functions as a parity mechanism. Common mechanics include:

  • Trigger: The lender offers a new borrower or group of borrowers a more favorable term (lower spread, reduced fees, improved covenants). The MFN clause specifies whether the trigger is an offer to a single borrower or to a class of borrowers.
  • Notice: Many MFNs require the lender to notify the MFN-holder in writing when the lender grants superior terms. The notice window and method are negotiable.
  • Matching or Adjustment: The borrower either receives the superior terms automatically (adjustment) or has the right to request matching terms (opt-in). Automatic adjustments are more borrower-friendly.
  • Scope and Limitations: MFNs can be limited by time (e.g., applies only for the first 12 months), by borrower type (e.g., only corporate borrowers with revenue over $50M), or by specific terms (interest rate and fees only, excluding covenant relief).

Common MFN types and examples

  • Rate-based MFN: Matches a lower interest rate or narrower spread if offered to another borrower. Example: “If Lender reduces the margin for any similarly situated borrower, Borrower’s margin will be reduced to the lower rate.”
  • Fee-based MFN: Applies to upfront or commitment fees. Example: lender lowers origination fee to a new client; the MFN-holder receives the same fee reduction.
  • Covenant/term MFN: Covers non-economic items such as looser covenants, longer amortization, or fewer reporting requirements.

Real-world illustration: a small business negotiated a rate-based MFN for a revolving credit facility. When the lender later offered a competing client a 200-basis-point reduction, the small business exercised the clause and saw immediate savings on future borrowings.

Drafting pitfalls and key negotiation points

An MFN is only as good as its drafting. Common pitfalls include:

  • Undefined comparability: If the contract doesn’t define who is “similarly situated,” the lender can argue the new borrower isn’t comparable. Define comparability by revenue, industry, collateral, guarantors, maturity, and loan size.
  • Overbroad carve-outs: Lenders often carve out deals with special syndication terms or promotional pricing. Insist that carve-outs be narrowly tailored and time-limited.
  • Notice and cure windows: A short or non-existent notice period can deny borrowers practical recourse. Negotiate a clear notice requirement and a defined window to elect matching terms.
  • Retroactive vs. prospective relief: Clarify whether the MFN applies retroactively (adjust prior pricing) or only to future draws/periods.
  • Syndication and assignment: For syndicated loans or participations, MFNs may complicate intercreditor relationships. MFNs can be ineffective if an agent or new lender refuses to apply adjustments across participants.

For guidance on covenant structure and interaction with MFNs, review our article on The Role of Covenants in Business Loan Agreements.

Intercreditor, syndication, and enforcement issues

MFNs create friction in multi-lender structures. Key considerations:

  • Agent vs. lender obligations: Ensure the loan agent has a contractual duty to notify and implement MFN adjustments across the syndicate. If the agent lacks authority, an MFN may be a hollow promise.
  • Participation agreements: Secondary market sales and participations can complicate MFN applicability. Include language that binds successors and assigns.
  • Enforcement options: Remedies for breach typically include an agreed adjustment, monetary damages, or specific performance. Contract the enforcement path up front. If a lender refuses to honor an MFN, common remedies include pursuing breach of contract claims or arbitration if provided.

Practical negotiation checklist

  1. Define the comparator group: Set objective comparators (asset class, revenue bands, guarantor profiles, collateral).
  2. Specify covered terms: List interest, fees, covenants, prepayment penalties, amortization, or other items you want covered.
  3. Set the effective period: Limit the clause to a reasonable period (12–36 months is common) or make it evergreen with periodic re-opener.
  4. Create clear notice mechanics: Require written notification within a fixed number of days and a defined response window (e.g., 30 days).
  5. Address intercreditor mechanics: Require the agent to implement adjustments and bind future lenders/assigns.
  6. Limit carve-outs: Narrowly define allowed carve-outs (e.g., strategic partnership deals approved by the borrower).
  7. Draft remedies: Provide automatic adjustments where possible and a short path to dispute resolution.

Red flags and when to decline an MFN

  • If the MFN is unusually narrow: a useless MFN is worse than none. Avoid language that only applies to hypothetical “publicized” pricing reductions.
  • If enforcement is unclear: vague notice or remedy provisions reduce value.
  • If the lender insists on broad carve-outs for “special relationships” without definition, treat it skeptically.

Monitoring and operationalizing an MFN

Having an MFN means you need an active monitoring plan:

  • Track competitor pricing: Keep a record of lender offers and market changes. Public market pricing and competitor term sheets are useful.
  • Keep a contract log: Record notice deadlines, response windows, and any matching elections.
  • Maintain communication with counsel: Have legal review ready to assert rights quickly if a trigger occurs.

Sample short MFN clause (illustrative only)

“If Lender, at any time during the Term, grants any borrower whose credit profile is substantially similar to Borrower (as defined below) more favorable economic or covenant terms than those applicable to Borrower, Lender shall promptly notify Borrower in writing. Upon Borrower’s written request within 30 days of such notice, Lender will amend the Loan Documents to provide Borrower with equivalent terms, retroactive to the effective date of such more favorable terms.”

This sample is illustrative and requires tailoring by counsel to your facts.

FAQs (brief)

Q: Are MFN clauses common? A: No; MFNs are negotiated provisions and are more common in competitive markets or for borrowers with leverage in negotiations. They are not standard boilerplate.

Q: Do MFNs apply automatically? A: It depends on the clause. Some MFNs provide automatic adjustments; others require borrower election.

Q: Can a lender exclude certain deals? A: Yes, lenders often insert carve-outs. Borrowers should narrow those carve-outs or define conditions under which carve-outs apply.

Related reading and internal resources

Authoritative sources and further research

These sources provide background on market practices and legal frameworks; MFN application depends on contract law and the specific loan documents.

Professional disclaimer

This article is educational and does not constitute legal, tax, or financial advice. Terms in loan agreements are fact-specific and often require review by experienced counsel and a financial advisor. In my practice advising borrowers, I recommend having both legal and financial review before signing or relying on an MFN provision.

If you’re negotiating or reviewing an MFN clause and would like a checklist or sample redline, consult your attorney or a qualified financial advisor who can review your documents in context.