Why is such a substantial agreement required for a loan?

When taking out a commercial loan, you may have noticed that many loan agreements are substantial, often taking up one hundred pages or more.

For something seemingly straightforward, this may seem like a lot.

However, it is important to understand why such a substantial document is required because it will contain essential information about your loan.

What is in the document?

A commercial loan agreement is the contract you make with your lender when you take on debt, and it details the entire arrangement in relation to the loan.

The main terms of a loan agreement will include the following:

• The names and details of all parties involved
• The amount borrowed and the purpose of the loan
• Payment terms/conditions
• Security for the loan
• Interest
• The obligations of the borrower and the documents that the borrower is required to deliver to the lender
• Events of default
• Circumstances in which lenders may enforce any security
• Restrictions on use
• The legal requirements and legislation involved.

It will also include any bespoke clauses agreed between the lender and borrower.

Why does it need to be so long?

The arrangement is designed to protect your business and the lender, ensuring that repayments are made according to the agreed terms – as well as doing a lot of legal heavy lifting.

Your agreement needs to be tight and all-encompassing to ensure that, if a breach occurs, both parties are protected. It also needs to help you identify what constitutes a breach of the loan agreement and your rights as a borrower.

Finally, your loan agreement needs to address a number of legal requirements, such as ensuring that any security granted is enforceable and that the business of the borrower continues in the manner it did on the date that the loan was granted to the borrower. These require a lot of detail and can leave no room for error – hence a long document!

For advice on drafting and signing commercial loan agreements, please contact Dashna at DashnaMorarji-Sagoo@palmerslaw.co.uk or by calling 07903 631780.