Make Your Document In 3 Easy Steps:
What is a Loan Agreement?
When should I use a Loan Agreement?
- you intend to lend money to either a company, partnership or LLP, or
- your company, partnership or LLP intends to borrow money from someone else
Make Your Document In 3 Easy Steps:
THIS AGREEMENT is made as a deed on the date of the last signature below (the Agreement)
(together, the Parties).
|Available Amount||the amount the Lender will make available to the Borrower under paragraph 4;|
|Borrowed Sum||the principal amount lent by the Lender to the Borrower under this Agreement which is outstanding from time to time;|
|Business Day||a day other than a Saturday, a Sunday or a public holiday in England and Wales;|
|Drawdown Notice||any notice in writing given by Borrower to the Lender under paragraph 6;|
|Event of Default||any event or circumstance specified in the paragraph entitled 'Default' below;|
|Facility||term loan facility made available under this Agreement;|
*Subject to terms and conditions
This Loan Agreement template covers:
the loan amount
the purpose of the loan
when and how the borrower can withdraw funds
when and how the loan will be repaid
whether the loan is secured or unsecured
assurances or warranties given by the borrower
obligations and restrictions on the borrower to help ensure the lender will be repaid
circumstances in which the lender can demand immediate repayment of the loan
A Loan Agreement is an essential document whenever you need to lend or borrow money, for example, if you are starting a business and require working capital (ie funds for general day-to-day purposes). A simple Loan Agreement clearly outlines how and when the loan will be repaid, which ensures both parties are protected during the lending process. For more information, read Loans and promissory notes and Loans between companies.
When lending money, an annual interest rate applies and is calculated based on the amount of the borrowed sum. The interest rest is payable by the borrower monthly or quarterly, and can either be a fixed percentage or a percentage above the base lending rate of a bank.
In case of late payment, another daily interest rate applies. This rate is payable from the date of non-payment to the date of actual payment. The daily interest rate for late payment is a percentage above the annual interest rate. For more information, read Calculating interest on commercial debts.
This Loan Agreement can include a provision allowing the borrower to repay the loan in full or in part at any time, by giving a certain notice to the lender. The lender may also require the borrower to pay an early repayment fee, which is a percentage of the borrowed amount.
A secured loan involves the borrower putting forward a source of equity (eg a house) to act as collateral for the loan. If the borrower defaults on the loan (ie fails to pay the sum payable on the due date or fails to comply with any provision of the Loan Agreement), the lender can take steps to take ownership of the collateral. Where the loan is to be a secured loan, you will need to prepare and enter into a separate Security Document to cover the collateral. Ask a lawyer for help preparing a Security Document.
An unsecured loan is a simpler type of loan under which the borrower does not need to provide collateral. In situations involving unsecured loans, lenders are not able to take ownership of borrowers’ assets in case of a payment default.
For more information, read Unsecured and secured loans.
The lender can cancel the term of the loan and ask for immediate repayment in case of default by the borrower.
Instead of a Loan Agreement, you should use a Promissory note if you are:
lending money to a private individual or sole trader
borrowing money as a private individual or sole trader, or
lending or borrowing small sums of money
A promissory note is legally enforceable; however, it is less formal than a Loan Agreement. For more information, read Loans and promissory notes.
Making your Loan Agreement online is simple. Just answer a few questions and Rocket Lawyer will build your document for you. When you have all the information about the loan prepared in advance, creating your document is a quick and easy process.
To make your Loan Agreement, you will need the following information:
What are the lender’s details (eg name and business structure)?
What are the borrower’s details?
Details of how the lender and borrower will sign the Loan Agreement.
If they are a partnership, what is the name of the partner signing the agreement?
If they are a limited liability partnership (LLP), will one member sign in the presence of a witness or will two members sign? What are the members’ details?
If they are a company, will one director sign in the presence of a witness or will two directors sign? What are the directors’ details?
Is the loan a secured loan?
Will the loan be used for working capital or other purposes? If so, what purposes will it be used for?
What is the sum of the loan?
Will the loan be available to the borrower until a specific date or for a set number of months?
If the loan is available until a specific date, when is the last day the borrower can access the loaned sum?
If the loan is available for a set number of months, for how many months can the borrower access the loaned sum?
How many days’ notice must the borrower give the lender before withdrawing the loan (in full or in part)?
Will interest be charged on the loan? If so:
What is the annual interest rate (as a percentage)?
Is interest payable monthly or quarterly?
What is the daily interest rate for late payments under the Loan Agreement (as a percentage)?
How many months or years does the borrower have to repay the loan?
Will the borrower repay the loan in monthly instalments, quarterly instalments or in full on a specified date?
If the loan is to be repaid in instalments, what is the amount of each repayment instalment and when does the first instalment need to be paid?
If the loan is to be repaid in full on a specified date, on what date does it have to be repaid?
Can the borrower repay the loan early?
If yes, how many days’ notice must the borrower give the lender to repay the loan early?
If yes, will the borrower have to pay a fee for early repayment? If yes, what percentage of the borrowed amount is the early repayment fee?
If either party is based in Scotland, will the laws of Scotland or the laws of England and Wales apply to this agreement?
A Loan Agreement is essential when money is being loaned by one party to a business borrower, as it sets out the specific terms attached to the loan. As a result, Loan Agreements will typically include sections on:
the parties’ details - the names, addresses and other details of the lender and borrower
the background - sets out that the borrower requires money, that the lender is lending the money to the borrower and that the parties wish to record the terms of the loan (and its repayment) in the Loan Agreement
meanings - sets out what is meant by key terms such as ‘Borrowed Sum’, ‘Business Day’, ‘Event of Default’ and ‘Purpose’. It also provides interpretations for parts of the agreement (eg any reference to the singular includes the plural and vice versa)
the loan - sets out the sum the lender is making available to the borrower and until when this loan is available to the borrower
drawdown - sets out how much notice the borrower must give the lender to drawdown (ie borrow on a particular day) the loan (in full or in part)
purpose - sets out that the borrow may only use the loan for the purposes detailed in the Loan Agreement and that the lender is not required to check this
condition to drawdown - sets out the conditions that need to be met before the borrower can drawdown the loan
interest - sets out the interest rate payable by the borrower on the outstanding sum of the loan. It also details how interest accrues, when it is payable and the daily interest rate in the event of a default on loan repayments
repayment - sets out the term of the loan and how the borrower must repay the loan (ie in one payment or in instalments). It also details provisions relating to the early repayment of the loan, if the borrower is allowed to repay it early
security - if the loan is a secured loan (under which the borrower provides collateral to the lender to protect against non-payment), this sets this out and references the separate Security Document granting the security
warranties - the borrower warrants (ie guarantees) that certain conditions and statements are true. The warranties under this agreement include that the borrower’s business is incorporated and validly exists and that the borrower has the authority to enter into the loan
undertakings - the borrower makes certain undertakings (ie written promises to do, or not do, something) until the loan is fully discharged. The undertakings under this agreement include the borrower giving the lender a copy of its audited financial statement within 180 days after the end of its financial year
default - sets out the type of events that constitute a default on the loan. Examples include the borrower failing to repay (part of) the loan when it is due and the borrower failing to comply with the terms of the Loan Agreement
the entire agreement - sets out that the Loan Agreement (and, where relevant, the Security Document) forms the whole agreement and supersedes any previous discussions
assignment - sets out that the borrower cannot assign (ie transfer) the agreement to another party without the lender’s consent and that the lender may assign the agreement
variation - sets out that variations to the Loan Agreement will only be valid and binding if they are in writing and signed
notices - sets out how any notices under this agreement must be written and delivered and when they are deemed to have been delivered
miscellaneous - includes certain boilerplate clauses and explains the enforceability of the Loan Agreement
governing law and jurisdiction - sets out whether the legal systems of England and Wales or Scotland must be used to resolve any disputes. For more information, read Jurisdiction and international contracts
If you want your Loan Agreement to include further or more detailed provisions, you can edit your document. However, you may want a lawyer to review the document (or make changes) for you to ensure that the modified Loan Agreement complies with all relevant laws and meets your specific needs. Ask a lawyer for assistance.
Make sure a Loan Agreement is the right document for your situation
This Loan Agreement should be used where a loan is being given to a partnership, LLP or company only. If money is being lent to an individual (be it a private person or a sole trader), a Promissory note should be used.
Consider charging interest and how much it will be
Interest is typically charged to make the risk of giving a loan (ie of the borrower defaulting on repayments) worth taking. In order to incentivise the borrower to repay the loan on time, default interest may be charged on overdue payments, at a higher rate than normal interest. For more information, read Loans between companies.
Consider whether you want the loan to be secured on unsecured
Consider whether the situation and the sum of money being loaned may require security being taken to ensure the repayment of the loan. Generally speaking, loans for smaller amounts of money don’t require security while loans for larger amounts do. For more information, read Unsecured and secured loans.
Understand when to seek legal advice
While it’s always a good idea to have your Loan Agreement reviewed by a lawyer, there are certain circumstances in which you should seek specific advice. Ask a lawyer for advice:
about whether the loan should be secured and the different types of security
and assistance on how to prepare a separate Security Document
if any of the parties are based outside England, Wales and Scotland