Five Important Clauses to Include Within Business Loan Agreements in England and Wales

A business loan agreement can be an often lengthy document with numerous clauses. However, these agreements are critical to protecting your company’s position. Business loans are similar to home loans and mortgages as they involve consideration of interest rates and security. However, a business loan agreement will have financial implications for all parties. Therefore, it is vital to have a lawyer prepare this document before finalising anything with another party. This article will set out the most important clauses to include within your business loan agreement to ensure complete protection for your business when lending money to another party. 

What is a Business Loan Agreement?

A business loan agreement is a loan contract where you lend money to another business. It is crucial to ensure that the contract protects your organisation’s best interests as the funds come from your company. Furthermore, different forms of business loan agreements might suit your company. Additionally, the type of clauses that you will include may depend on the kind of organisation you make the loan to. 

Below we explore five essential clauses for your business loan agreements with other parties.

1. Payment Terms Clause

This type of clause should confirm:

• the exact amount of money that your company will loan the other party;
• which date you will pay the loan to them;
• the purpose of the loan; and
• any restrictions on them using the money (for example, an agreement that they will not use it as security for other loans).

Ultimately, a Payment Terms clause provides key detail regarding the loan amount. Additionally, it will outline promises from the other party on how they can (and cannot) use those funds.

2. Secured or Unsecured Loan Clause

There are two main types of business loans that your organisation can action. The first is a ‘secured’ loan. In this case, your company obtains additional security for the loan within the business loan agreement. You would typically do so by having the other party agree to give your business possession of certain goods or property in the event of non-payment. Naturally, the security should be worth at least as much as the loan.

The second type of business loan is an ‘unsecured’ loan. This is less attractive to your company because you do not own any items, goods or property under the business loan agreement in the event of default. Although you can sue the other party for debt, you may struggle to recover your loan if your business loan agreement does not include any security.

3. Interest Clause

An interest clause allows your business to charge interest on the business loan. Often, companies will do this as a primary way of seeking profit from the loan. However, your organisation should also use interest to cover the risk of non-payment. For example, if the loan is risky, the interest level should reflect this with an increase in interest rate.

A well-drafted interest clause should include:

• confirmation of whether the interest rate is a fixed rate (i.e. at a set figure) or at a floating rate (i.e. based on a figure that can vary over time);
• explanation of how interest calculations and whether, at specific points, penalty interest will apply (for example, if the money is not all paid back within the time frame of the loan); and
• when interest is payable (for example, every year or month following any late repayment).

The Interest clause is often keenly negotiated between parties. So naturally, your company will not wish to agree to a low-interest rate unless you have very high confidence that they will repay the loan in full and in time.

4. Repayment Terms

A repayment clause will clarify whether the loan repayment is due as a lump sum on a specific date or whether regular repayments are due. For example, payments might occur each month on a specific date.

It is good to state that failure to make any weekly, or monthly repayments will trigger the requirement to repay the loan in full. This can be useful for your business because failure to make periodic payments typically implies that the other party does not have much money. In this case, you may wish to act quickly to claim your money back or seize any security.

5. Breach of Contract Clause

A breach of contract clause outlines what constitutes a breach of the agreement. In addition, it may outline what your company can do in those circumstances.

The most common breaches of contract may include the other party failing to make a due repayment or the loanee’s company becoming insolvent.

Ultimately, this clause should outline that the other party should return the money upon any significant breach of contract. Furthermore, it should state that your company can enforce the loan’s security against them if they fail to do so.

Key Takeaways

The clauses within your business loan agreements are essential. If your agreement does not contain relevant clauses, you may struggle to regain your loan or use it to claim security in the event of non-payment. As a result, you consider consulting a lawyer to ensure your business loan agreements contain clauses that will protect your business. 

If you need help with business loan agreements, our experienced commercial contract lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 0808 196 8584 or visit our membership page.

Frequently Asked Questions

How important is the type of interest sought?

The type of interest that you wish to acquire is crucial to your agreement. A fixed interest rate is more straightforward and provides you with knowledge of potential fees. However, a floating rate (or a benchmark rate) can be based on the Bank of England Base rate and, therefore, increase (or decrease) in line with base rate fluctuations.

What conditions could my business attach to the business loan?

You could consider blocking the other party from obtaining other loans during the period of your loan (or having to seek your permission before doing so). It is also helpful to require them to confirm that they will not grant any other organisation security over their assets.