If you’re a director and want to borrow money from your company or lend money from your personal finances to your company, you must have a legally binding loan agreement created.
In this article, we explain what a Loan Agreement is and the best practice for drafting this type of contract.
What is a director’s loan?
A director’s loan from your company is money that isn’t classed as:
- Salary, dividend, or expense repayments
- The money you have previously paid into or loaned the company
You’re legally required to keep a Director’s Loan Account that records the money you pay into or withdraw from the company. This information must also be recorded on the balance sheet of your company accounts.
A director’s loan can be secured over your property or assets.
What is a Director’s Loan Agreement?
Whether you’re making a loan to the company or the company is providing a loan to you, you’ll need a Loan Agreement. The agreement will set out the following:
- Repayment terms
- Interest rates
- What happens in the event of a default
- Prepayment terms
- Fees and expenses
- Representations and warranties
- Governing law
The above list isn’t exhaustive. What is included in the Loan Agreement will depend on the circumstances of the loan.
Therefore, having an experienced solicitor draft the agreement is crucial to ensure all the necessary terms are included.
Does a Loan Agreement have to be witnessed?
A Loan Agreement should be witnessed by an independent third party.
It's important to note that if the governing law clause of the Loan Agreement references a country other than England and Wales, you may be required to have the witnesses’ signatures notarised.
Why is it important to have a Loan Agreement?
Loan Agreements are an important part of borrowing money; they protect both the borrower and the lender.
A Loan Agreement includes the details of the transaction, including the loan amount, the interest rate, and the terms.
It’s recommended to have a Loan Agreement in the following cases:
- Draft Loan Agreement between director and company
- Draft Loan Agreements between individuals
- Draft agreement for conversion of loan into equity
Is a Loan Agreement legally binding?
Yes, it is. A Loan Agreement is a legally binding document between a lender and a borrower.
They set out the terms on which the lender is prepared to loan a certain amount of money to the borrower and the mutual obligations of each party.
We’ve created a free Unsecured Loan Agreement template, that you can use to provide a contractual framework to evidence a loan and set out the terms upon which the loan is made.
Get legal assistance from LawBite
Loans between a company and its directors or shareholders can be complex, especially concerning tax. It’s essential to seek legal advice concerning drafting a Loan Agreement to ensure all the relevant terms are included to avoid future disputes.
LawBite has helped 1000s of startups and small businesses achieve their commercial ambitions. To find out how LawBite can help your business draft financial documents, book a free 15-minute consultation or call us on 020 3808 8314.