A Guide to Our Loan Agreement

by Kate Mccormick - Solicitor

Our guide to our loan agreement will assist you with step by step instructions on how to fill it out and make make you aware of any other information you may need to do so.

A Guide to Our Loan Agreement

This Loan Agreement is for use by an individual or a business to grant an unsecured loan to a third party. The Agreement sets out the basis of the loan and the obligations of the parties and creates a legally binding contract that can be relied on in court.

Clauses in this Loan Agreement

Cover page - you will need to insert the names of party 1 (the Borrower) and party 2 (the Lender).

Between – this clause defines whom the Loan is granted by and to. You need to insert the details of both parties to the Loan here including their business/company name and registered number (if either party is a registered company) and registered office or trading address.

Background - this clause gives background information to set the scene for the grant of the Loan. You need to insert the amount of the Loan here.

Definitions and interpretation – this clause defines the main terms used in the Agreement.

Loan – this clause sets out the purpose and background for the Agreement.

Repayment – there are two options for repayment; either by instalments or as a single sum. You should enter further clear details about the sums to be repaid and the exact dates for repayment, depending on the exact arrangement that has been agreed.

Interest – two options are provided; for interest to be charged on the amount of the loan or for no interest to apply. If interest is to be charged, this can be set at a defined rate above the base rate of a specified UK bank (usually the Lender’s bank). This interest will apply whether or not the Borrow pays on time. A further provision can be inserted for default interest to apply at a higher rate if the Borrow fails to make any repayment on the date that it is due.

Early Repayment – this clause permits the Borrower to repay the Loan or any part of it early after having given one month’s notice to the Lender. You can amend the notice period to suit your requirements.

Immediate Repayment – this clause sets out circumstances when the Loan will become immediately due. You should amend or delete the items in square brackets according to the particular situation and nature of the Borrower as a company or individual. Section 123 of the Insolvency Act 1986 as mentioned in clause 6.6 states that a company is unable to pay its debts if:
a creditor has served a written demand on the company for payment of a sum exceeding £750 and the company has not paid the amount owing within three weeks of the demand;
any court order or judgment in favour of a creditor of the company remains wholly or partly unpaid by the company;
the court has ruled that the company is unable to pay its debts as they fall due or that the value of the company’s assets are less than its liabilities.

Power of Borrower to create mortgages – this clause contains two options: either the Lender will permit the Borrow to create charges and mortgages over its property whilst the Loan is outstanding in which case clause 7.1 should be included, or the Lender will not permit the Borrower to charge its assets whilst the Loan remain unpaid, in which case only clauses 7.2 and 7.3 should be included and the items in square brackets should be deleted.

Covenants by the Borrower – this clause is designed to regulate the conduct and activities of the Borrower whilst the Loan remains outstanding in order to protect the Lender. The covenants are designed to help ensure that the Borrower has sufficient funds to reply the Loan in full and does not do anything that may prejudice its ability to do so. If one or more of the covenants are breached by the Borrower, the Lender may require it to immediately reply the Loan in full in accordance with clause 6 of the Agreement.

Security – this clause should only be included where there is an existing debenture in place between the Lender and Borrower to which the outstanding Loan is to be added.

Assignment - this clause prevents the Lender from assigning their rights under the Agreement to a third party who is a competitor of the Borrower without the consent of the Borrower. The Borrow is not entitled to assign its rights under the Agreement without the Lender’s prior written consent.

Notices – this clause explains how notices should be given from one party to the other in connection with the Agreement.

Execution clause – this clause makes the Loan Agreement enforceable. You need to insert the names of both parties and the officers who are authorised to sign deeds on their behalf. Both parties then need to sign the Loan Agreement in front of an independent witness who should not be connected to them. Once the Loan Agreement has been signed it should be dated on the Cover Page and also at the top of Page 1. This is the date that the Loan Agreement will commence. Both parties should keep a copy of the signed Loan Agreement.