A loan agreement is a contract between the lender and the borrower of money or property. It sets out the terms and conditions of the loan, and the rights and responsibilities of each party.

Application for small business people

Many small businesses need to take out loans from financial institutions or other lenders in order to get established or maintain liquidity. When this happens, it is vitally important that the terms of the loan are clear to each party so as to avoid any misunderstanding and to minimise the possibility of a costly and time-consuming legal dispute. This is achieved by setting out the details in a loan agreement.

Most financial institutions have their own standard loan agreements that they use whenever they lend money to a customer. These loan agreements can be quite lengthy and complicated legal documents. It is advisable that small business owners seek legal advice to confirm their understanding of loan agreements before signing anything that will bind the business.

Small businesses may also borrow funds from a financier other than a bank, such as a relative, colleague or one of the business owners. Loan agreements are also recommended in these situations to clarify the terms of the loan. Without a clear loan agreement, it is possible that the parties may have different ideas about how and when the loan is to be repaid.

There may also be situations where a small business is lending company funds to an employee or associate. Loan agreements offer the small business legal protection in case the borrower fails to repay the funds according to the agreed terms.

6 key things to consider

When entering into a loan agreement, some of the factors you will need to consider include:

  1. Who are the parties to the agreement? Will it be in your personal name or the company name?
  2. What is the amount of the loan?
  3. What is the term of the loan and how are repayments to be made?
  4. Will interest be charged? If so, what is the applicable interest rate?
  5. What penalties (if any) will apply if the borrower is unable to repay the loan?
  6. Is there any security for the loan or will a guarantor be required?

Joe Kafrouni, Legal Practitioner Director, Kafrouni Lawyers

Disclaimer

The information provided by Kafrouni Lawyers is intended to provide general information and is not legal advice or a substitute for it. Small business people should always consult their own legal advisors to discuss their particular circumstances. Kafrouni Lawyers makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Lawyers.

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