Loan Agreements

Whether you are lending or borrowing money it is important that the terms of your agreement are accurately detailed in a formal agreement in order to help prevent a potential future dispute.

A Loan Agreement is a formal contract between two parties which details the terms of an agreement for funds to be lent by one party to another. It also serves as a formal record evidencing the funds being lent.

There are typically two different types of Loan Agreements:-

  • Secured; and
  • Unsecured.

Secured Loans

A secured Loan is secured against an asset of the Borrower or if it is a company the Borrower itself. A secured loan may be secured against a property by way of a legal charge, a company’s assets by way of a debenture, or, such other asset of the Borrower that is capable of having an interest secured against it.

If a loan is to be secured, the Lender may wish to consider carrying out such investigations as are necessary to ensure that the asset being secured is of sufficient value to secure the loan being provided. Further, it is essential that the asset may be realised, i.e. sold, in the event that the Borrower defaults on the terms of the Loan Agreement. Such asset must therefore be marketable otherwise the security may not be of benefit to the Lender.

Unsecured Loans

An unsecured Loan Agreement is just that, unsecured. It may therefore be more difficult to recover funds where they are unsecured. This is because the Lender will need to pursue the Borrower directly for breach of the agreement and recover funds from the Borrower instead of taking possession of a secured asset.

However, it is likely to be easier to pursue a party for the funds being lent in the event that they are not repaid when due, if the terms of the loan are written down in a formal agreement as oppose to there being no formal record of the parties arrangement.

Terms

A Loan Agreement usually includes the following terms:-

  • Parties –
    • It is important that the parties to the agreement are clearly set out in order for them to be identifiable in the event of a dispute. Further, there may be more than one Lender or Borrower, and the Loan may be guaranteed by a third party.
  • Loan –
    • The amount being lent should be clearly detailed in the agreement, including any obligation to provide further funds.
  • Term –
    • The length of time for which the loan is to be provided should be set out. It may be for a fixed term or the loan may be repayable on demand or in the event of a default of the terms of the agreement by the Borrower.
  • Interest –
    • If interest is to be charged on the Loan, the amount of interest, as well as how the interest is to be repaid, should be clearly expressed.
  • Repayment –
    • How the loan is to be repaid should be agreed between the parties and set out in the agreement, whether this will be by way of monthly repayments or in one lump sum.
  • Purpose –
    • It may be beneficial to limit the use for which the Borrower may use the funds by setting out a specific purpose for the Loan

A Loan Agreement should include or at least consider some or all of the above terms, as well as such other terms agreed between the parties to the Loan, to clearly set out the terms on which it is being provided. For instance, if a loan is to be secured, the Lender may wish to include covenants in connection with the Borrower’s use of that asset for the duration of the term of the loan, in order to ensure that the asset is protected.

Whichever you require advice in connection with a secured or unsecured Loan Agreement, or even if you are still undecided and need some further advice, our specialist team of Commercial Solicitors can provide you with the assistance you require.