Posted by Minna Boyle on 11 December 2018
What Is A Loan Agreement?
Getting a loan can give you the financial boost you need to get your business off the ground or prepare for the next stage of growth. A Loan Agreement is a legal document that sets out the terms and conditions of a loan between a lender (person loaning the money) and a borrower (person receiving the money). This is a really important contract to ensure the money is borrowed and repaid according to the arrangement agreed on by both sides.
If you’re borrowing money directly from another person – such as your family or friends – you’re taking out a private loan and you need a loan agreement.
Private loans can either be secured or unsecured.
Secured loan: if the borrower fails to repay the loan, the lender can take ownership of a valuable asset, such as a house. In other words, the house is taken as ‘security’ for the loan. If you get a secured loan, you may also need a separate ‘security’ agreement. The secured property will usually be registered on the Personal Property Securities Register, also known as the PPSR.
Unsecured loan: There is no security for the loan. If the borrower fails to repay the loan, there is limited recourse for the lender to recover the loan money.
Normally if you get a loan from the bank, you won’t need to get a loan agreement drafted from scratch. The banks should provide you with their standard legal documentation. However, this doesn’t mean you can just sign – make sure you get a lawyer to properly review the terms of the loan so that you know exactly what you’re signing up to!
Loan Agreement Example
Andy is starting a mobile dry-cleaning business. Andy needs an extra $5000 to go towards buying a van. Andy’s brother, Tommy, offers to lend Andy the $5000 to be repaid in 5 months. Since Tommy is family, Andy doesn’t think a loan agreement is needed. However, once they start talking about the terms of the loan, they realise that while Andy thought the loan would be repaid in monthly installments, Tommy wanted the loan repaid fortnightly. Eventually they agree the repayments would be fortnightly after the first month. They then have a lawyer draft a loan agreement so the arrangement is clearly and legally documented to avoid any further misunderstandings.
What’s In A Loan Agreement?
Here are the sorts of issues that are typically covered in your Loan Agreement.
- LOAN AMOUNT – How much is being loaned?
- LOAN TERM – When will the loan be repaid by?
- INTEREST RATE – What is the interest rate on the loan?
- REPAYMENTS – How frequently will loan repayments be made and when will the repayments end?
- DEFAULTS ON PAYMENT – What happens if the borrower doesn’t pay on time? Or at all?
Need Help With A Loan Agreement?
Taking out a loan for your next business venture can be just the financial boost you need – but putting together a Loan Agreement without professional legal advice is a risky move. It can be hard to know how to word it and everything you need to include. It’s a good idea to invest in a lawyer to assist you with this process, as it’s a one-off cost that can save you from misunderstandings and disputes in the long run.
At Sprintlaw, we have a team of experienced lawyers can assist you with drafting or reviewing Loan Agreements. Get in contact with one of our consultants for a no-obligation chat on how we can help you put together a loan agreement and help with any other legal issues your business may have.