Margin ratchet
What is a margin ratchet on a business loan?
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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
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A margin ratchet steps a loan's interest margin down as a stated ratio improves — usually leverage — and up as it worsens, according to a grid in the facility agreement. It rewards a business for paying debt down and prices the bank for the risk it actually holds, but it ties the interest bill to the covenant definitions: the same choices about what counts as debt and as earnings now decide what the business pays as well as whether it complies. Read the step points and the test dates; a ratchet that moves only at an annual review moves late in both directions.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
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