Whether you are lending money to a friend or family member in times of financial hardship or investment into a new business venture, have you considered what would happen in the event that the agreement between you both is dismissed?
Relationships between friends and family members at the best of times can be testing, adding what can be the most contentious element there is, “money”, to the mix and you are gearing up for a whole host of problems.
When lending between friends and family members consideration is often not given to what might happen in the event that;
– the borrower fails to repay the loan as initially agreed between you both
– the borrower recalls the terms of you advancing the money to them differently to you and considers the money as a gift
– the relationship breaks down and you are no longer on talking terms
– the borrower dies
What may seem unnecessary and too formal, a Loan Agreement protects both you and the borrower from any unforeseen issues and avoiding quarrels in the future, you both know exactly where you stand in respect of the loan.
The Loan Agreement sets out the terms in which you have agreed to loan the money to them. Some of these terms might include:
Amount of the loan
Whilst the amount of the loan may have been agreed between you, how is it intended to be advanced? Will this be in one full payment or you might want to advance the money in instalments. Depending on the circumstances of the loan you might want the ability to lend additional amounts in the future and for those advances to be covered by the same terms.
Repayment of the loan
It has been agreed that the intention of loan is to be repaid and is not a gift to the borrower, so when will this be repaid? At the end of a specified duration or in instalments. If it is to be repaid in instalments, how much would each instalment be and the frequency in which each instalment is made.
Purpose of the loan
Why specify the purpose of the loan being advanced to the borrower? This focuses both the lender and borrower on why the money is being loaned and the purpose it is intended to be used for. This protects further protects the lender in the event that the borrower uses the money for illegal purposes.
Interest due on the loan
Is it intended that interest would accrue on the amount of the loan? If so, at what rate and how is this payable.
Events of default
Generally a lender does not have the right to request early repayment of the loan. Loan Agreements establish events of default which once triggered enables you the ability to demand repayment of the loan immediately. These event may include:
– the borrower fails to make payment as it falls due
– the borrower uses the loan for a purpose other than the one agreed
– the borrower become bankrupt
– the borrower dies
Whilst the above-mentioned is not intended to be an exhaustive list of events, these would be tailored to suit the nature of the transaction.
Whilst the Loan Agreement is the key document establishing the lender/borrower relationship and governing the terms of the advance of money and the fact that the sum was not intended to be a gift. Securing the loan is beneficial to a lender, especially in the event that the borrower becomes bankrupt or is unable to make payments as they fall due. In the event that security is not given, the lender would then fall into a pool of general creditors awaiting recovery of the debt due (in some cases the full amount due may not be recoverable), where as if the lender has requisite security you would have priority over the general creditors, giving you a better chance of recovering the money that is due to you.
Whilst the above-mentioned is not intended to be an exhaustive list of provision which can be covered, the intention of any well-structured Loan Agreement is to safeguard against all eventualities and is bespoke to nature of the loan.
If you require any advice in relation to a Loan Agreement, contact Robyn and the Business Services team on 01604 828282 / 01908 660966 or email mailto:BusinessServices@franklins-sols.co.uk