Before you sign
A loan agreement records a debt: how much is lent, what interest runs on it, when and how it is repaid, and what the lender can do if it isn’t. It might be a director lending to their own company, an investor lending to a start-up, one business lending to another, or a loan within a family. A commercial loan will usually also contain events of default, promises from the borrower about its finances and how it will use the money, and sometimes security or a personal guarantee.
For a lender, the usual problems are an agreement that doesn’t make the money repayable when you expect, default events that don’t cover what actually goes wrong, and no security, so that if the borrower fails you rank alongside every other unsecured creditor. For a borrower, the risks are default clauses that let the lender demand everything back after one late payment, interest and fees that add up to more than you had worked out, and restrictions on repaying early. A guarantor is taking on the debt personally if the borrower can’t pay, often with few limits.
The review reads the agreement from your side (borrower, lender or guarantor), rates each clause, flags what’s missing and suggests wording to ask for. The full report is £49 + VAT.
Why it’s worth checking
Loan agreements tend to be signed quickly, often because the money is needed quickly. The clauses that matter most when things go wrong, what counts as a default and what happens next, are the ones people read least carefully.
Directors’ loans are a good example. Say a director lends £50,000 to see their company through a difficult year, and the only record is an entry in the accounts. If the company later becomes insolvent, the director is an unsecured creditor: paid, if at all, after the secured lenders and preferential creditors, and alongside every other unsecured creditor. A written agreement makes the terms clear but doesn’t change that ranking on its own. Security would. Be aware, though, that security granted by a company that is already struggling can be challenged if it later goes into liquidation or administration, particularly where the lender is a director or other connected person, so security is best agreed when the money is lent.
Interest is the next thing to check. There’s no general legal cap on the rate for a business or private loan in England and Wales, so the agreement is what controls the cost. It should say whether the rate is fixed or variable, whether interest is simple or compounds (and how often), and when it is paid. A higher default rate after a missed payment is common and a modest uplift is usually unobjectionable, but a rate out of all proportion to the lender’s legitimate interest risks being unenforceable as a penalty.
Default clauses deserve a slow read. Most commercial loans include an acceleration clause, which lets the lender demand the whole balance once an event of default has happened. The list of defaults often goes well beyond non-payment: breach of any other term, an untrue representation, insolvency, a default under another loan (cross-default), or a change of control. A borrower should look for grace periods and a right to remedy breaches that can be put right. A lender should check that the list covers the risks it actually cares about.
Family loans raise a different question. Imagine parents give their son £40,000 towards a new business and nobody writes down whether it is a loan or a gift. If the parents die, or the business fails, executors or an insolvency practitioner will want to know which it was, and without a document the answer may turn on patchy evidence years later. A short written agreement settles it.
One caveat. Lending to individuals can be regulated consumer credit under the Consumer Credit Act 1974, with its own rules on the form and content of the agreement. If that might apply to you, take specialist advice.
Key terms to look for
Loan amount and purpose
The amount lent, how and when it is drawn down, and any restriction on what the money can be used for.
Interest rate
Whether the rate is fixed or variable (and if variable, linked to what), simple or compounding, when interest is paid, and any higher default rate.
Repayment schedule
Whether the loan is repaid in instalments, in one lump sum at the end, or on demand, and what happens if a payment date is missed.
Security and guarantees
Any charge over the borrower’s assets and any personal or company guarantee, including how far the guarantee reaches and whether it is capped.
Events of default
What counts as a default, whether there is a grace period or chance to put things right, and what the lender can then do, usually demand full repayment.
Prepayment
Whether the borrower can repay early, on what notice, and whether a fee or break cost applies.
Representations and warranties
Statements the borrower makes about its finances and position. If one turns out to be untrue, that is usually an event of default.
Governing law
Which country’s law governs the agreement and which courts deal with disputes.
Common mistakes
No written agreement or only a verbal agreement
An oral loan is still enforceable, but proving its terms is hard. Lender and borrower may remember the rate, the repayment date or even whether it was a loan at all quite differently. Put the amount, interest, repayment terms and any security in writing and have both parties sign it.
Unclear or undefined interest rates and calculation methods
If the agreement doesn’t say whether interest is simple or compound, how often it compounds, what a variable rate is linked to, or when interest is payable, the parties will calculate different figures. The method should be spelled out, ideally with a worked example or repayment schedule attached.
No security or guarantees protecting the lender
An unsecured lender to a company that fails ranks behind secured and preferential creditors and shares what is left with the other unsecured creditors. If the amount matters, consider a charge over the borrower’s assets or a personal guarantee. A charge given by a company must be registered at Companies House within 21 days of creation, or it will be void against a liquidator, administrator or other creditors.
Vague or overly harsh default triggers
If a single payment a day late lets the lender demand the entire loan, a borrower with a short cash-flow problem can be pushed into crisis. Borrowers should ask for grace periods, a right to remedy and a materiality threshold. Lenders need defaults that are clear enough to rely on without argument.
Missing provisions on prepayment or early repayment
Outside regulated consumer credit, a borrower generally has no right to repay a fixed-term loan early unless the agreement allows it, and some lenders charge a fee or break cost to protect their interest income. The agreement should say whether early repayment is allowed, on what notice, and at what cost.
Best practice
If you are lending, state the amount, purpose and drawdown clearly, and spell out the interest calculation and payment dates. Decide at the outset whether you need security or a guarantee, and if you take a charge from a company, make sure it is registered at Companies House within 21 days. Make the default events cover the risks you actually care about, and make sure the remedies (demanding full repayment, enforcing security) are clear. Include representations from the borrower about its financial position, and a governing law and jurisdiction clause.
If you are borrowing, work out the total cost of the loan, including fees and how compound interest will build up, and check the repayment schedule is one you can meet. Look for grace periods and a right to remedy before the lender can call in the whole loan. If you are giving security, know which assets are covered and whether you need the lender’s consent to sell them. Check whether you can repay early and at what cost.
If you are asked to give a personal guarantee, read it as if you will have to pay, because you might. Look for a cap, check whether it covers only this loan or all money the borrower owes the lender, and don’t sign until you understand it.
Questions
What is a personal guarantee and what does it mean to give one?+
It is your personal promise to pay the borrower’s debt (usually your company’s) if the borrower doesn’t. If the lender calls on it, you can be sued personally, and if you can’t pay, the lender can enforce a judgment against your assets or seek to make you bankrupt. Check whether the guarantee is capped, whether it covers only this loan or all money the borrower ever owes the lender, whether it continues if the loan terms are changed, and whether it is backed by security over your own assets. A guarantee must be in writing and signed by the guarantor to be enforceable.
What is the difference between a charge and a mortgage?+
Both are security that let a lender enforce against an asset if the debt isn’t paid. Strictly, a mortgage transfers an interest in the asset to the lender until the debt is repaid, while a charge attaches the asset to the debt without any transfer; what is commonly called a mortgage over land is now a registered legal charge. For company borrowing, the more useful distinction is between a fixed charge over specific assets, which the company can’t dispose of without the lender’s consent, and a floating charge over a changing pool of assets such as stock, which the company can deal with in the ordinary course until the charge crystallises. Charges created by a company must be registered at Companies House within 21 days.
What happens if I miss a payment on a loan?+
Look at the default clause. Missing a payment is usually an event of default, sometimes only after a grace period. Once a default has happened, the lender can typically charge default interest, demand immediate repayment of the whole loan (acceleration) and, if the loan is secured, enforce the security. Some agreements give you a period to pay before the lender can act. If you think a payment will be late, talk to the lender before the date passes, and get any agreed extension in writing.
Can I repay a loan early without penalty?+
Only if the agreement allows it. Outside regulated consumer credit, there is no general right to repay a fixed-term loan early, so if the agreement is silent the lender may be entitled to insist on the agreed schedule. Many agreements allow prepayment on notice, sometimes with a fee or a break cost to cover the lender’s lost interest. If flexibility matters to you, negotiate a clear prepayment right before signing.