When you are lending or borrowing money as a business, it can feel daunting and having the right protection is crucial.
A well-drafted loan agreement not only protects your interests and ensures smooth repayment, but can also avoid disputes down the line.
Our Associate Solicitor, Dashna Morarji-Sagoo, investigates.
What type of loan do I need?
There are many types of loans you can have, but generally loans fall into two categories – secured loans and unsecured loans.
A secured loan is secured by an asset, such as your home, car or any other valuable items and are usually granted over a period.
The lender can claim to possess or take control of the asset if there is a breach by the borrower on the terms of the lending, including failing to make payments when due.
An unsecured loan does not involve security and can be based on financial information or credit history and is usually payable on demand.
Regardless of the type, a professionally drafted loan template is essential to protect both parties.
Many lenders can make a simple mistake, which can lead to costly disputes or even losses, but with the right approach, we can help you legally enforce your loan.
Why does a loan agreement matter?
Skipping a formal party agreement could put you and your business at risk, so it is important to have a clear and constructed agreement between both sides.
The loan agreement will contain, amongst other provisions, clauses to cover the term of the loan, the repayment method and whether interest is to be charged.
It serves as legal proof in cases of disputes or late payments and it is required by HM Revenue and Customs (HMRC) to determine tax liability for both parties.
Without a written contract, the loan could even be treated as taxable income and you should ensure your finances are protected.
How can I legally protect myself?
When lending, always check that you are complying with the Consumer Credit Act 1974, which regulates credit agreements and protects borrowers.
A clear and comprehensive loan agreement is your best protection and we can help you start the process.
How can you make sure your loan is enforceable?
To make sure your loan is enforceable and valid, always clearly state the amount and the exact purpose of its use.
Overlooking the interest rate clause can cost you, so you must include the exact rate in per cent per annum, whether it is fixed or floating and how interest is calculated.
Clear repayment terms are a key step in creating your loan and setting up a repayment schedule is ideal.
This should include due dates for Enterprise Management Incentives (EMIs), the total number of payments and any late payment penalties.
Outlining what counts as an event of default and the lender’s rights can protect you from legal fees and we can help guide you on this.
What are the risks of my loan being incorrect?
In your loan agreement, consequences can result in recalling an entire loan, seizing security and taking legal action against the borrower.
It could be detrimental to the continuation of any business so a dispute resolution is important to help protect even the most precise loan templates.
Loans are a legal document and having both parties agree with valid signatures and a third-party present to witness can make your loan even more protected.
Following these steps will not only make sure your loan is secure but also protect you in the future against any risks or disputes.
If you need advice on how to draft a loan agreement, contact our banking and finance team.