All these agreements are drawn outside the Consumer Credit Act 1974. Whilst that makes them unsuitable for companies in the business of lending or providing credit, for private lending they are very flexible, allowing you to make, more or less, the deal you choose.
These agreements can be used:
For short- or long-term lending
Regardless of where the two parties are: UK or abroad
For loaning amounts of any size, and with repayment terms of any complexity
The terms in these documents
Each document is drawn for circumstances that differ slightly from the others, so the terms in each vary. But be assured - all the documents include the terms appropriate for their purpose.
Note that we provide very extensive guidance notes with every document that explain each paragraph in the document in detail.
Almost all the templates provide for guarantors – even if the amount lent is secured against other assets as well.
In most cases, a guarantee is much more effective than other types of security because non-repayment risks a relationship and the reputation of the guarantor as well as of the borrower. Even if the borrower's credit history is impeccable, a guarantor could be brought in.
Additionally, in most situations, the lender only needs to satisfy himself that the guarantor has sufficient assets overall and passes a credit check, and therefore doesn’t have to perform detailed valuations of individual items offered as security.
We strongly advise that you insist on a guarantor when you lend to a company. The guarantor should be one or more directors of the company. Remember that a guarantee is far more effective if it includes the spouse or life partner of a director.
The time period during which the sum is lent can be any you choose. There are no “legal” consequences if the term is long or short: no notices, no special registrations.
We suggest that the duration is a specific time period, such as one year, rather than conditional on another event, such as a student loan application being accepted. The problem with a conditional event is that even if it is certain to happen, the two parties may not have the same expectations as to the timing at the outset.
There is no limit in law on the interest rate or the total interest amount that the lender charges. It can be whatever the two parties agree. It could be fixed for the duration, or variable from one time period to another depending on another factor (such as a bank rate). It could be reduced for prompt payment.
We have optionally provided for a greater rate of interest if the debtor falls behind with regular repayments.
Interest could be accrued and all paid at the end of the term, or it could be payable in regular (e.g. monthly) payments. Deferment is more common if the sum borrowed is to be spent on a project that realises a large return at the end of the term, and the principal and interest are paid together.
Loan repayment also could be staggered - we allow optionally for a schedule to be used.
The lender is given strong protection
All templates provide strong protection for the person or party lending the money. This applies more to those documents where the reason for lending is a business one rather than to help family or friends. We take the simple view that since the money is not a gift, everyone expects it to be repaid.
If you are lending to a family member it is unlikely that you will want to bankrupt him for a failed repayment. However, in a business deal remember that if the business goes down, a dispute as to entitlement is more likely to be against a liquidator or receiver than against the shareholder-director who took on the debt. That is why we make the terms of these agreements so strong.
Assets as security
Physical goods can provide sound security because the lender should be able to acquire them and sell them easily should the debtor default. Of course, goods that can be removed easily provide better collateral than those that require specialist equipment to move them.
In these agreements, the sum lent can be secured either by taking physical possession of the assets at the outset, or by leaving them where they are and describing them in sufficient detail in the agreement so that there can be no dispute as to what is charged. The agreement then provides the evidence that the item is secured.
Security is explained fully in the guidance notes to each agreement.
Lending to a company requires registration of the charge
If a company borrows against security then registration of the charge at Companies House will be required, if the lender wants to be given preference over unsecured creditors.
Bankruptcy and liquidation law is very complicated. There are rules as to the ranking priority order of different creditors. A creditor arrangement where the document is registered at Companies House takes priority over debts which are not registered. Strangely, it is the company that has the legal obligation to register every charge or debt, even though registration protects the creditor.
When the debt is repaid, whether fully or in part, the company has no obligation to inform Company House. However, it is in the company's own interests that potential investors and lenders are aware that it has satisfied all or part of the debt.
Although we provide explicitly that the company will register the charge, it is best if the lender makes sure this is done. The debt will then be valid against a liquidator or administrator, should the company become insolvent.