Thinking About A Loan For You Business? You Might Need A Loan Agreement

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What Is A Loan Agreement?

Securing a loan can provide the essential capital needed to launch your business or propel it into its next phase of expansion. A Loan Agreement is a formal contract that outlines the terms and conditions of a loan between a lender (the party providing the funds) and a borrower (the party receiving the funds). This contract is crucial to ensure that the loan is borrowed and repaid in accordance with the terms mutually agreed upon by both parties.

Private Loans

If you’re borrowing money directly from another individual – such as family or friends – you’re engaging in a private loan and a loan agreement is necessary.

Private loans can be either secured or unsecured.

Secured loan: if the borrower fails to repay the loan, the lender can claim ownership of a valuable asset, such as property. This asset is taken as ‘security’ for the loan. In New Zealand, if you obtain a secured loan, you may also need a separate ‘security agreement’, and the secured property will typically be registered with the Personal Property Securities Register (PPSR) in New Zealand.

Unsecured loan: There is no collateral for the loan. If the borrower fails to repay the loan, the lender’s options for recovering the loaned funds are limited.

Bank Loans

Typically, if you secure a loan from a bank, you won’t need to create a loan agreement from scratch. The bank will provide you with their standard legal documentation. However, it’s crucial not to simply sign on the dotted line – ensure that you consult a lawyer to thoroughly review the terms of the loan so you understand the commitments you are making.

Loan Agreement Example

Andy is launching a mobile dry-cleaning service and needs an additional NZ$5,000 to purchase a van. Andy’s sister, Toni, offers to lend him the NZ$5,000 to be repaid over 5 months. Initially, Andy didn’t think a loan agreement was necessary because Toni is family. However, when they discuss the loan’s terms, they realise there are misunderstandings – Andy assumed monthly repayments, while Toni expected fortnightly repayments. After some discussion, they agree on fortnightly repayments starting after the first month and decide to have a lawyer draft a loan agreement to clearly and legally document the arrangement, preventing any future confusion.

What’s In A Loan Agreement?

Here are the key elements typically included in a Loan Agreement:

Loan Amount – How much is being loaned?
Loan Term – By when should the loan be repaid?
Interest Rate – What is the interest rate on the loan?
Repayments – How often will repayments be made, and when will they conclude?
Defaults on Payment – What are the consequences if the borrower fails to make payments on time or at all?

Need Help With A Loan Agreement?

Obtaining a loan for your next business venture can be the financial boost you need – but creating a Loan Agreement without professional legal guidance is risky. It can be challenging to know the correct wording and all the necessary inclusions. Investing in a lawyer to assist with this process is a wise decision, as it’s a one-time expense that can protect you from misunderstandings and disputes in the future.

At Sprintlaw, our team of experienced lawyers can assist you with drafting or reviewing Loan Agreements. Contact one of our consultants for a no-obligation chat on how we can help you with a loan agreement and any other legal matters your business may face. Call us on 0800 002 184.

Minna Boyle

Minna is the Head of People & Culture at Sprintlaw. After completing a law degree and working in a top-tier firm, Minna moved to NewLaw and now manages the people operations across Sprintlaw.