Loan agreement
If you lend money to another person or lend to or borrow from your own company, it is wise to record the agreements made about this loan in writing. This prevents confusion and disagreement at a later stage and can offer protection if the debtor gets into financial difficulties.
A good loan agreement will cover when amounts have to be repaid, either in instalments or a single lump sum, whether interest is payable and, if so, at what rate. Another important issue is whether any security is offered for the lender’s benefit. If there is a special reason for the loan, it is a good idea to explain this clearly in the recitals to the loan agreement. This can prevent difficult discussions later. Take, for example, the situation of having to explain to a stranger later why exactly the agreement was entered into, if the debtor dies or a company that has borrowed money acquires a new owner.
How can you maximise the likelihood of the loan being repaid? A pledge over a business’s shares, fittings and stock will be unaffected by insolvency, making it an attractive security option. Other arrangements you may encounter in a loan agreement include: preference rights to purchase the business for a price agreed in advance; a provision that the entire outstanding amount is payable on demand if payments are not made on time; a penalty payable if payments are not made on the exact dates required; and an obligation to provide a bank guarantee or the right to require a bank guarantee in the event of even a minor breach.
Even where the borrower and the lender have a very good relationship it may be wise to provide some protection for the lender. If a family member lends money and the borrower goes bankrupt, it won’t do the relationship any good if the lender ends up failing to recover his money from a trustee in bankruptcy. If you lend money to your own company and it becomes insolvent, you’ll be glad you established a valid pledge or option to buy.
In practice, loans and arrangements about the repayment of old debts are often mixed together. This is another situation where specifically tailored written agreements are a wise idea. Even if you have a good relationship, always make sure agreements are clearly expressed on paper as this will spare you arguments and regrets at a later stage.