We work with both individuals and companies on business or personal loan agreements. Our service covers dealing with agreements for unsecured loans or secured loans and related charges taken as security. Expertise in acting for lenders and borrowers provides a specialist service.
We are always happy to provide a quote and initial thoughts on a loan agreement. Please do call us to discuss your loan agreement and any related matter. We have a good track record.
Reasons for picking us
We are a specialist law firm focused on SMEs, investors, directors and families.
- We are set up to deliver a quick service to meet pressing demands.
- We act for lenders or borrowers and have the expertise to handle family loans including security for loans and charges over assets such as commercial property.
- We act for act for many different types of businesses. Many come to us as they are tired of overcharging by large law firms.
To help you work out what you need to focus on we have explained below:
- Commercials behind a loan agreement
- Security for funding
- Regulatory requirements
- Employee or Consumer
- Alternatives to loans
Agreement for loan – terms
A typical loan agreement sets out the terms on which a lender will provide financing for the borrower and the parties should consider whether to include the following terms:
These are pre-funding conditions which a lender wants to see satisfied before agreeing to release funds.
The parties should consider whether interest is payable on the loan being made and if so what the rate should be. There can be FCA implications as explained below.
Repayment and pre-payment terms
The parties should consider how and when the loan is to be repaid and whether the borrower is entitled to make any voluntary prepayments.
A lender often requires protection in the form of indemnities (which is a promise by the borrower to pay to the lender on a pound-for-pound basis on a particular type of loss arising). For example, if there is an event of default (please see further comments below).
Differences in types of loan agreements
The terms loan agreement and facility agreement are often used interchangeably, however the legal standing is slightly different – a loan agreement is a contract that can only be entered into if the lender effectively transfers the funds to the borrower while a facility agreement is a promise to transfer funds upon the borrower’s request.
Representations or warranties under part of the loan terms
Representations or warranties – these are statements of current or past fact (or law) and operate to flush out information at the start of the transaction. Lenders use representations to limit their lending risk. The negotiation of the representations complements a lender’s due diligence process and provides a remedy if a borrower supplies information that turns out to be untrue.
Matters covered by the representations are often of importance throughout the term of the loan as a lender will typically require (some or all of) the representations to be repeated.
What is important under an agreement for a loan
A borrower needs to consider carefully if it is able to give the representations requested. It must decide which representations are:
- acceptable subject to disclosure;
- acceptable if amended;
The objective of financial covenants is to define in financial terms the parameters within which a borrower may operate its business. They provide:
- an objective assessment of change to a borrower’s financial position;
- the means of monitoring the borrower’s financial position on a regular basis;
- an early warning of potential financial difficulty for a borrower;
- a means of imposing financial discipline on a borrower.
Events of default
Typically, a lender does not have an inherent right to demand early repayment of a loan. Therefore, the facility agreement needs to specify circumstances or events that, if they were to occur, would give a lender that right. These circumstances or events are usually called events of default. Events of default will vary for individual transactions and will need to be tailored and negotiated as appropriate. They are usually heavily negotiated.
Security for lending
Typically, a lender agrees to lend to a borrower if it is provided with sufficient security for the loan. If security is provided, the loan is known as a secured loan and the loan can be secured against, for example, property of a borrower (in the form of a legal charge), or business and assets of the borrower (in the form of a debenture), which then becomes a secured debt owed to the lender.
We can deal with registering the security at Companies House or the Land Registry which acts as warning to other would be lenders.
Default under a loan agreement
If a borrower defaults on a loan and is unable to repay it whether in full or in part, the lender may seek to enforce the security that it has taken if these are reserved as part of the investment terms.
Regulatory requirements applicable to all agreements for loans
To lend to an individual, you are required to either be (i) regulated by the Financial Conduct Authority (FCA) or (ii) exempt from the Consumer Credit regulations governed by the FCA.
Exemption for loan agreements with companies
If you are lending to companies then you do not have to comply with the Consumer Credit regulations.
Exemptions from the FCA requirements if lending to an individual
The main exemptions from the FCA requirements attaching to investment terms for personal loans are:
- If it is a business loan;
- If the loan is for purchase of land that the borrower or his/her family does not intend to reside in;
- Where the loan is being repaid in less than 12 months and is secured over land (but cannot be for the purchase of land);
- Where the total charges (interest and otherwise) do not exceed 1% above the base rate per annum for the term of the loan; or
- If the borrower is deemed a high net worth earner. The borrower is deemed to be a high net worth earner if throughout the year he has net assets of £500,000.00 and/or (ii) has received during the previous financial year net income of more than £150,000.00 and in all cases signs a statement to waive his rights under the consumer credit regulations.
Employee or Consumer?
There are some caveats to the general rule when it comes to consumer protection, one that many businesses seek to rely on is employees. The Consumer Rights Act, which deals with both consumer rights and unfair terms is very limited in nature, only a contract of employment/apprenticeship would be exempt from consumer protection. If you are dealing with an employee in a circumstance where they are a consumer and the Company is a trader, they will have full consumer protections.
Further, the Courts have taken the widest possible definitions of consumer and trader in recent cases, the ECJ have commented that activities facilitating or carried out in connection with a main activity can be caught by the consumer protection rules. The Advocate General (under an EU case) recently noted that stating an activity was not “in the scope of professional competence” would create unpredictable results and that something that would have had full consumer protection can not be exempt because the consumer and trader are also employee and employer.
Loans to employees are further complicated by the specific credit rules and regulatory restrictions as set out above.
Alternatives to loans
You want to lend money to a business but you are not convinced of its financial viability or stability, how can you secure and protect your interests?
There may be a number of alternatives to consider.
Third party guarantee and indemnity
Third parties can also guarantee and indemnify lending, where a third party (usually connected to the borrower, a sister company, parent company or connected individual) guarantees their personal assets and promises to pay where the borrower fails. Guarantees and indemnities will impose restrictions on the guarantor personally.
Equitable charge over shares
People sometimes overlook that it is possible to take a charge over shares. The charge can extend to any shares be they in the borrower or in a director’s portfolio. This could be helpful for companies with assets such as commercial property.
Personal guarantees can achieve security in private lending if the director/shareholder has personal assets that can be secured against.