As the owner of a small business, from time to time, there may be occasions when you loan money to others or seek loans yourself from other parties. This may be because traditional bank financing may not be an option in that particular case or because there may be other reasons why a private loan is required; perhaps for ease and readiness of financing, poor credit rating, or perhaps because the debt-to-equity ratio is already quite high – putting off mainstream lenders.
Irrespective of the reason for the loan, it will be in both parties’ interests to document the arrangement into a Loan Agreement. In this article, we‘ll explore Loan Agreements in greater detail – what they are, what they do and what should be included.
What is a Loan Agreement?
A Loan Agreement is a contract between two parties, the lender and the borrower, which evidences a loan transaction taking place between them and records the agreed terms of that loan.
Why is it important to put a Loan Agreement in place?
These documents are very helpful in setting out the precise details of the loan and the terms of its repayment. They also make very clear the status of the transaction so that neither party can later claim that the payment was something other than a loan, for example, a gift or a payment for shares, etc.
What should be included in a Loan Agreement?
There are various clauses included in a Loan Agreement, but here are some of the most important.
- Details of parties – the document should make very clear who’s the borrower and who’s the lender. So, for example, if an individual borrows money, then that individual should be responsible for its repayment. It wouldn’t usually be in the lender’s interests for the documentation to be in the borrower’s company name, as the company may not have any assets or may become insolvent, etc.
- Loan details – the Loan Agreement should specify how much the loan is and its repayment terms. This will likely include the amount of each repayment instalment and the applicable repayment schedule (i.e. weekly/monthly).
- Interest – if there‘s interest due on the loan amount, then the Loan Agreement should specify how much interest and how it should be paid.
- Method of payment – the Loan Agreement should specify when the loan should be paid and how; so, for example, if £10,000 is to be paid by bank-to-bank transfer in cleared funds by the lender to the borrower by ‘time and date’, then that should all be recorded. To increase the level of detail and certainty, It'd be advisable to specify the relevant bank account details in the document. Likewise, repayment terms should be equally specific.
- Currency – it’s in both parties’ interests for the relevant currency to be clearly stated to avoid any confusion arising. This is particularly important if the two parties are based in different countries. Also, stating the currency saves any disputes related to currency exchange rate fluctuations.
- Guarantor – if any guarantor exists, they should be joined as a co-signatory into the Loan Agreement. The only possible variation to this is if you’d have a separate Guarantee Agreement. Still, for most relatively small-scale private loan arrangements, it’d usually be preferable to simply join them into the Loan Agreement and include a suitable guarantee clause.
- Security – if there’s to be any security for the loan, this should be documented in the Loan Agreement. If the security is to be over property, then you’ll also need a separate Mortgage Deed in support to register the charge to the property title at HM Land Registry. If a company borrows the money and a charge or debenture is being created in support of the loan (whether over company property or any other company assets), then this charge must also be registered with Companies House within 21 days of its creation. Otherwise, the charge will be potentially void and unenforceable against a liquidator, administrator or other creditor of the company.
If you need advice regarding a Loan Agreement, whether drafting or reviewing a new document or, analysing your rights and obligations under an existing one or require some general legal advice in this area, LawBite’s expert lawyers can advise.
Appointing an expert lawyer to assist you gives you the peace of mind that your documents will be professionally drafted and suited for your business needs. LawBite can advise on the detailed wording of the Loan Agreement to ensure it protects you and your business.
About the author
Ashley Gurr is an expert contract lawyer at LawBite. Ashley has over 15 years of experience in private practice, helping SMEs and in-house for an international consultancy group advising on commercial agreements and a multi-national utility giant in a contract strategy role.