Loan agreements should be clear, concise and set out the intention of the parties.
Borrowing or lending money whether it be between family, friends or business associates may seem benign. But in reality, it is best to treat loans as strictly business. This means recording your agreement in a form that is legally binding – that is, in writing and validly signed.
Discussing the terms and conditions of the loan – and documenting what you have agreed too – ensures the arrangement remains amicable.
If problems occur down the track, the Loan Agreement should evidence what was agreed to and can be used to enforce the Agreement.
As such, the document should be clear, concise and express with certainty the intention of the parties. In addition the parties should address any matters that may become an issue in the future, with the aim of minimising the potential for disputes or misunderstandings.
Here are some pertinent points you should consider when you are entering into a Loan Agreement.
- The amount of the loan;
- What the loan will be used for;
- How the loan will be drawn down – will it be provided in a lump sum or drawn down in stages?
- How the loan will be repaid and the frequency of any repayments;
- The rate of interest and how it will accrue and be paid;
- Other costs associated with the loan, such as legal fees, bank fees, late fees, book keeping or accounting fees, etc;
- Record keeping and accounting;
- An exit plan – will there be a way for the lender to recover their money early if they need too? Can the borrower repay the funds early if they wish? Will fees apply if a party exits the loan early?
- Will security be taken over assets of the borrower?
- Will the lender require guarantor’s, especially pertinent if the borrower is in the form of an artificial legal entity, such as company or trust. In this case, directors, shareholders or beneficiaries may be asked to guarantee the borrower’s obligations under the Loan Agreement;
- Are there any special conditions;
- Signing clauses – have the companies or individuals who are a party to the Agreement validly signed the Agreement in a way that is legally binding?
This list above is in no way exhaustive and depending on the transaction you may not need to consider them all. If your transaction is more complex, you may need to secure professional financial advice and/ or legal advice before finalising your Agreement.
Ideally, your Loan Agreement should clarify the rights and obligations of the parties involved, set out the terms and conditions on which the money is being lent, provide certainty as to what is expected from each party and minimise misunderstandings and disputes in the future.
Loan Agreement Templates
Unsecured Loan Agreement – for loan arrangements with directors guarantee.
Secured Loan Agreement – for loan arrangements secured by property – machinery cars etc.
Div 7a Loan Agreement – for loans made between a company and its directors and / or shareholders.