If you choose to access financing for your business through a commercial loan, it’s important to understand who needs to agree to and authorise the debt before you proceed.
Commercial loans are a common way of investing in and growing a business, but it means taking on debt, so key directors and stakeholders who will be affected by the debt should agree to the loan.
Does this mean that every director needs to agree on a loan agreement and sign on the dotted line? This depends on a company’s internal rules as set out in its articles of association and relevant shareholder agreements.
Authorisation
Generally, all directors of the borrower (the company) will need to authorise the borrower’s entry into the loan, as well as any security offered.
This should ideally be done in an official capacity and be evidenced by board minutes.
This may also be required by:
- Lender’s criteria – To ensure responsible borrowing and prevent financial mismanagement, some lenders require that all directors are aware of and in agreement with the loan, particularly for larger loans.
- Professional advice – In some circumstances, a solicitor or accountant may advise you to involve all directors in all parts of the process, such as when not doing so could contravene legislation or there are concerns on the part of one director.
Putting names to paper
Authorisation is only the first step towards taking out a loan and is the point at which a unanimous decision should be made regarding the next steps.
However, in terms of transactional documents, contracts and loan agreements can be signed by one director in the presence of a witness or by two directors.
This is designed to relieve the administrative burden of taking out a commercial loan, as long as all directors have verbally agreed to the loan, and this is recorded in minutes or associated documents.
However, larger loans may require all directors to be signatories to ensure that all parties are aware and happy to proceed.
Ultimately, the business itself is the borrower, rather than individual directors. While directors will not be personally liable for the loan, the long-term success of the business and associated income for directors and employees could be affected if the loan leads to further debts or insolvency.
We can provide impartial, straightforward advice to any business owner or director considering taking out a commercial loan.
Contact Dashna Morarji-Sagoo by emailing DashnaMorarji-Sagoo@palmerslaw.co.uk or calling 01375 484443 or BJ Chong by emailing BJChong@palmerslaw.co.uk
The contents of this article are intended for informational and educational purposes only.