How To Draft A Business Loan Agreement In New Zealand

If you’re running a small business, chances are you’ll borrow money at some point - whether that’s to smooth cashflow, buy equipment, fund stock, or invest in growth.

And while it can be tempting to keep things “simple” (especially if you’re borrowing from someone you know), having a properly drafted business loan agreement in place is one of the best ways to protect your business from day one.

In this guide, we’ll walk you through what a business loan agreement typically includes in New Zealand, which legal terms matter most, and the practical tips that can save you a lot of stress later.

What Is A Business Loan Agreement (And Why Do You Need One)?

A business loan agreement is a written contract where one party (the lender) agrees to lend money to another party (the borrower) on defined terms. In a business context, the borrower is often:

• a company (e.g. your trading company),
• a sole trader (you personally), or
• a partnership (the partners jointly).

Even if the lender is a friendly investor, a family member, or a related company you control, it’s still a loan - and it can create legal and tax consequences.

A clear business loan agreement helps you:

• avoid misunderstandings (what was agreed, when repayments start, what happens if things go wrong),
• prove the arrangement to your accountant, bank, investors, or (in worst cases) a court,
• enforce repayment if you’re the lender, or defend unfair demands if you’re the borrower, and
• allocate risk properly (especially if the loan is secured by business assets or supported by personal guarantees).

In New Zealand, most loan agreements are governed by standard contract principles and the Contract and Commercial Law Act 2017. That means the wording you use (and the documents you sign alongside the loan) can make a big difference to what you can actually enforce later.

Before You Draft: The Key Commercial Decisions To Get Clear On

Before you get into legal clauses, you’ll get a better result by nailing down the commercial “deal” first. Most disputes happen because parties never fully agreed on the basics.

Here are the big questions to answer upfront:

• Who is lending? An individual, another business, a trust, or a related company?
• Who is borrowing? Your company, you personally, or a group entity?
• How much is being borrowed? Is it advanced in one lump sum or in drawdowns?
• What’s the purpose of the loan? (e.g. working capital, equipment purchase, expansion).
• Is the loan secured or unsecured? If secured, what assets are being used as security?
• Will there be a guarantor? Many lenders require directors to personally guarantee a company loan.
• How will repayments work? Interest-only, principal and interest, balloon payment, or on demand?
• What interest rate applies? Fixed or variable, and how (and when) it can change.
• What happens if things go off track? Defaults, late payments, insolvency events, enforcement rights.

If you’re borrowing from a shareholder or a related party, it’s also worth checking your governance documents early. For example, your Company Constitution or your Shareholders Agreement may include rules about related-party transactions, director approvals, or how funds can be advanced.

Key Legal Terms To Include In A Business Loan Agreement

A well-drafted business loan agreement isn’t just a “repay me by X date” IOU. It should cover the full lifecycle of the loan: making the advance, managing it while it’s on foot, and what happens if something goes wrong.

Below are the most common clauses you’ll want to think about.

1. Parties, Background And Definitions

Start with the basics, but do it carefully. The agreement should correctly state:

• full legal names,
• entity types (individual/company/trust),
• NZBN or company number (if relevant), and
• registered address (especially for companies).

Definitions are also more important than they look. If you define “Business Day”, “Default”, “Security”, or “Repayment Date”, you reduce ambiguity and avoid disputes later.

For many small businesses, getting the “borrower” right is critical. If you intended the company to borrow, but the agreement is signed personally, you may unintentionally create personal liability.

2. Loan Amount And Advance Mechanics

Your business loan agreement should clearly set out:

• Principal amount (the loan amount),
• advance date(s) and whether there are multiple advances,
• conditions precedent (what must happen before the lender is required to advance funds), and
• how payment is made (e.g. bank account details, payment reference, proof of transfer).

Conditions precedent often include things like providing signed guarantees, executing security documents, or board resolutions approving the borrowing (especially for companies).

3. Interest, Fees And Default Interest

This is where a lot of DIY loan agreements fall over - not because charging interest is complicated, but because it’s easy to be unclear.

Consider including:

• interest rate (and whether it’s fixed or variable),
• interest calculation method (daily accrual is common),
• payment frequency (monthly/quarterly),
• fees (establishment fees, admin fees), and
• default interest (a higher rate that applies after a default).

Depending on the nature of the lender, the borrower, and how the loan is structured, the Credit Contracts and Consumer Finance Act 2003 (CCCFA) may apply (including in some situations involving personal guarantees). The compliance requirements can be technical, so it’s worth getting tailored legal advice if there’s any doubt.

4. Repayment Terms (And Early Repayment)

Spell out exactly how the borrower repays the loan. For example:

• repayment schedule (dates and amounts),
• what happens if a repayment date falls on a non-business day,
• whether the borrower can repay early, and
• whether break fees apply (particularly if interest is fixed and the lender is pricing based on term).

Also consider whether payments are applied first to fees, then interest, then principal (this is common and affects how quickly the loan reduces).

5. Purpose And Use Of Funds

Some loans are purpose-specific (e.g. equipment purchase). If you’re the lender, a “purpose” clause can help you manage risk and give you leverage if the funds are used in a way you didn’t agree to.

If you’re the borrower, be careful not to over-restrict yourself - you don’t want to technically breach the agreement because you used funds for a legitimate business expense that wasn’t listed.

6. Security, Guarantees And Priority

Two common ways lenders protect themselves are:

• security (rights over assets if the loan isn’t repaid), and
• guarantees (a third party promises to pay if the borrower doesn’t).

If the loan will be supported by a guarantee, you’ll usually document that in a separate Deed of Guarantee and Indemnity. This is important because guarantees often need tighter drafting than a basic loan clause, especially around enforcement and indemnities.

Security is covered in more detail below, but as a starting point: if security is intended, your business loan agreement should clearly reference the security documents and set out how they interact.

7. Events Of Default (What Counts As A Breach?)

This is one of the most important parts of a business loan agreement because it defines when the lender can take action.

Typical events of default include:

• failure to pay on time,
• breach of other obligations in the agreement,
• insolvency events (e.g. inability to pay debts, liquidation, receivership, voluntary administration),
• false or misleading information provided during negotiations, and
• unapproved disposal of secured assets (if the loan is secured).

The goal here is to be clear and commercially reasonable. If default triggers are overly broad or vague, it can create disputes - and if you’re the borrower, it can leave you exposed to an “on paper” default even when you’re acting in good faith.

8. Remedies, Enforcement And Costs

If a default occurs, what can the lender do? Your agreement should cover:

• acceleration (making the entire loan immediately due and payable),
• enforcement of security (where relevant),
• the lender’s enforcement options (which may include appointing a receiver where the loan is secured and the documents and law allow it), and
• cost recovery (legal fees, enforcement costs, debt collection costs).

These terms need to be drafted carefully - especially where the borrower is a company and enforcement may interact with insolvency rules and priority regimes.

9. Notices, Governing Law And Dispute Resolution

Most business loan agreements include “practical” clauses that don’t seem exciting until you need them.

For example:

• Notices: how parties must send formal notices (email, courier, address for service), and when they’re considered received.
• Governing law: typically New Zealand law, and often a chosen NZ jurisdiction.
• Dispute resolution: sometimes negotiation/mediation steps before court action.

These clauses can materially affect how fast (and how expensive) it is to resolve issues if a relationship breaks down.

Secured Vs Unsecured Business Loans (And The Documents That Often Sit Behind Them)

One of the biggest drafting decisions is whether your business loan agreement is secured or unsecured.

Unsecured Business Loan Agreements

An unsecured loan means the lender doesn’t have specific rights over assets if the borrower doesn’t repay. The lender may still sue for repayment under contract law, but they’re essentially relying on:

• the borrower’s promise to repay, and/or
• a guarantor’s promise (if a guarantee is in place).

Unsecured loans are common for smaller amounts or where the lender trusts the borrower, but they carry more risk for the lender - which often shows up as a higher interest rate or tighter default clauses.

Secured Business Loan Agreements

A secured loan means the lender has security over some or all of the borrower’s assets, so they can enforce against those assets if the borrower defaults.

In New Zealand, business security over personal property (like equipment, inventory, vehicles, receivables) is often documented using a General Security Agreement (sometimes called a GSA). Security interests are primarily governed by the Personal Property Securities Act 1999 (PPSA).

If you’re taking security, it’s also common to register it on the PPSR to protect priority against other creditors. Practically, that means you’ll usually want to register a security interest promptly after the security is granted (and correctly identify the debtor and collateral).

Security can also include other types of interests (like mortgages over land), which are governed by different rules (for example, under the Property Law Act 2007). If land is involved, you’ll almost always want specific legal advice because the documentation and enforcement rules are different to PPSA security.

Do You Need A Separate Loan Document If It’s Secured?

Often, yes. A loan agreement sets out the money terms (principal, interest, repayments). The security document creates the security interest and enforcement rights over assets.

Depending on your situation, you might use a standard Loan Agreement and pair it with security documents, or you might use a purpose-built Secured Loan Agreement that is drafted to work neatly with the security package.

This is also where it’s important not to rely on generic templates - security drafting is one of the easiest places to get caught out, especially if the borrower has multiple lenders, multiple entities, or valuable movable assets.

Common Drafting Mistakes (And Simple Tips To Avoid Them)

Most small business owners don’t set out to draft a “bad” business loan agreement - it usually happens because everyone is focused on getting the funds in quickly.

Here are common pitfalls we see, and what to do instead.

1. The Wrong Borrower Signs The Agreement

If you intended your company to borrow, make sure the company is the borrower and signs correctly. This usually means:

• the company is named as borrower, and
• a director signs on behalf of the company (with the correct signing block).

If you accidentally sign personally, you may become personally liable for repayment (even if the funds went into the business).

2. “Handshake Loans” With No Clear Repayment Trigger

It’s common to see terms like “repay when the business can afford it”. The problem is that this can be hard to enforce because it’s vague and open to interpretation.

If flexibility is needed, consider alternatives like:

• interest-only for a set period, then principal repayments,
• repayment linked to revenue milestones (with clear definitions), or
• a defined maturity date with the ability to extend by written agreement.

3. No Default Process (Or A Default Process That’s Too Aggressive)

Lenders want strong protections - but borrowers also need certainty and fairness. It’s usually better to have a clear, practical default process (for example, a notice and remedy period for non-payment) than a vague “lender can do anything” clause that creates conflict.

4. Security Is Mentioned, But Not Properly Created Or Registered

Saying “this loan is secured” in a business loan agreement doesn’t automatically create enforceable security rights over assets.

If security is part of the deal, you generally need:

• a properly drafted security document (like a GSA), and
• correct PPSR registration (where relevant).

If you miss this step, you may discover too late that you’re an unsecured creditor - even though you thought you were protected.

5. Not Thinking About The “What Ifs”

A strong business loan agreement isn’t just about the best-case scenario.

It should also cover situations like:

• the borrower sells the business,
• a director leaves,
• the lender wants repayment early (and whether they can demand it),
• cashflow issues cause a missed payment, and
• the borrower takes on other debt (and how that affects priority).

It can feel a bit awkward to raise these issues upfront - but it’s far less awkward than trying to renegotiate after something has already gone wrong.

Key Takeaways

• A properly drafted business loan agreement makes the commercial deal clear and helps protect both borrower and lender if circumstances change.
• Before drafting, get clear on the fundamentals: who is borrowing, who is lending, how repayments work, whether interest applies, and what happens if there’s a default.
• Key legal clauses usually include interest and fees, repayment schedules, events of default, enforcement rights, notice clauses, and dispute resolution.
• If the loan is secured, you’ll often need separate security documents (such as a General Security Agreement) and correct PPSR registration under the Personal Property Securities Act 1999.
• Common mistakes include naming the wrong borrower, using vague repayment wording, failing to properly document or register security, and not planning for “what if” scenarios.
• Loan documentation should be tailored - especially where related-party loans, guarantees, or valuable business assets are involved.

This article is general information only and isn’t legal, tax or accounting advice. If you’re unsure how the rules apply to your situation, it’s best to get advice tailored to your business.

If you’d like help drafting or reviewing a business loan agreement, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.