As a condition to lending, the lender will require certain statements of fact or warranties from the borrower. Such warranties may include:
the borrower conducting its business properly
the borrower not being in any financial difficulty that could jeopardise its ability to repay the loan
the information on which the lender based its decision to lend being accurate
To help ensure the borrower makes payments on time, default interest (which is higher than the normal rate of interest) may be charged on payments that are overdue.
The borrower must use the loan for the purpose approved by the lender and must often make certain other promises (or 'covenants') about what the borrower must and must not do while it has the lender’s money. Examples of the 'must dos' are the borrower continuing to conduct its business properly and lawfully, and notifying the lender if it looks like it might breach the loan agreement. Examples of 'mustn’t dos' are changing the nature of its business or disposing of any asset outside the ordinary course of business without the lender’s consent.
The lender may insist the borrower grants a form of security to protect against non-payment by the borrower. Security in this sense is a form of collateral taken over other assets of the borrower which the lender can call upon if the borrower does not have the money to repay the loan – in the same way a bank takes a mortgage over a house. For more information on the difference between secured and unsecured loans, read Unsecured and secured loans. To learn more about taking security, Ask a lawyer.