Repricing Clauses in Business Loans: What Triggers a Change

Overview

Repricing clauses give lenders a legal path to change the price of a loan after closing. They aren’t a catch‑all; specific triggers and limits must be written into the promissory note or loan agreement. Understanding those triggers reduces the risk that a business will face unexpected interest-cost shocks.

Common triggers that can cause repricing

• Benchmark rate movement: Many business loans tie pricing to a benchmark — prime rate, SOFR, LIBOR (legacy agreements), or another published index. A change in that benchmark, or a formal switch to a replacement rate, can trigger a repricing (see Federal Reserve and market guidance on benchmarks).
• Borrower credit deterioration: Drops in a borrower’s credit rating, a lower debt-service coverage ratio, or worsening financial statements often allow lenders to raise the spread.
• Covenant breach or default: Violating affirmative/negative covenants (for example, missed financial covenants or late payments) commonly triggers repricing rights or penalty spreads.
• Material adverse change (MAC) clauses: Broad MAC or material adverse effect provisions let lenders reprice if the borrower’s business suffers major decline, such as loss of a major customer or sudden asset impairment.
• Collateral value or LTV changes: A fall in collateral value (real estate or inventory) that raises loan-to-value can prompt repricing or require additional collateral.
• Change in ownership or control: Sales, mergers, or management changes can trigger repricing or acceleration clauses.
• Regulatory or tax events: New regulations, tax rulings, or sanctions that affect lending costs may be reflected in repricing language.

How repricing is typically implemented

Lenders usually include specific mechanics in the loan documents: what triggers repricing, how the new rate is calculated (benchmark + spread or a penalty spread), notice period, effective date, and any cap/floor. Some agreements limit how often repricing may occur (for example, once per quarter) and may state maximum spread increases.

What to watch for in the loan documents

• Exact trigger language: Narrow, clearly defined triggers reduce lender discretion. Broad MAC language gives lenders more leeway.
• Spread vs. benchmark changes: Know whether the lender will move the benchmark, the spread (margin), or both.
• Caps, floors and step‑downs: Caps limit how high a rate can go; floors set a minimum. Step‑down language may reduce spreads if performance improves.
• Notice and cure periods: Look for the time the lender must give notice and whether you can cure a breach before repricing.

Practical borrower strategies

• Negotiate tighter trigger definitions and longer cure periods at signing.
• Ask for caps or limits on spread increases and for a minimum notice period.
• Build liquidity or a contingency line to cover higher payments if repricing occurs.
• Consider interest‑rate hedges or swap agreements — see our guide on interest rate hedging for variable-rate business loans for details: “Interest Rate Hedging for Variable-Rate Business Loans” (https://finhelp.io/glossary/interest-rate-hedging-for-variable-rate-business-loans/).
• When repricing risk is high, weigh converting variable-rate debt to fixed-rate through refinancing (see “Refinancing Variable-Rate Debt to Fixed Rate: Timing and Cost Analysis” for timing considerations: https://finhelp.io/glossary/refinancing-variable-rate-debt-to-fixed-rate-timing-and-cost-analysis/).

Real‑world example

A small manufacturer had a loan tied to prime plus a 2% spread. After two quarters of lower sales and a covenant breach on a coverage ratio, the lender exercised its repricing right and raised the spread by 1%. The borrower negotiated a 90‑day cure period and successfully restored the coverage ratio; the lender then stepped the spread back down as the agreement permitted.

In my practice I’ve seen similar situations where early negotiation of cure periods and caps prevented long-term payment stress. Proactive transparency with your lender often leads to more workable outcomes than surprise communication after a covenant breach.

Checklist before you sign

• Identify all repricing triggers and how the new rate is calculated.
• Confirm notice, cure, and effective dates.
• Negotiate caps, floors, and frequency limits.
• Evaluate hedging or refinancing options.
• Keep clear financial records and model cash-flow scenarios for higher-rate outcomes.

When to get professional help

If repricing language is unclear or aggressive, have your attorney and lender‑facing advisor review the agreement. Consider a CFO, outside CPA, or commercial finance attorney to help model repricing outcomes and negotiate protections.

Authoritative sources and further reading

• Consumer Financial Protection Bureau — consumer lending and interest-rate topics (https://www.consumerfinance.gov)
• Federal Reserve — guidance on benchmark rates and market functioning (https://www.federalreserve.gov)
• Small Business Administration — borrowing basics and lender considerations (https://www.sba.gov)

Disclaimer

This article is educational and does not replace personalized legal, tax, or financial advice. For advice specific to your situation, consult your attorney or licensed financial advisor.