Loan agreement

Money moves between a company and the people around it all the time, and very little of it is documented. A director puts funds in to cover a quiet quarter. A parent company lends to a subsidiary. A friend of the business bridges a gap until an invoice is paid. When it goes well nobody minds. When it does not, the absence of a document turns a loan into an argument about whether it was a loan at all.

This is an unsecured loan

It gives the lender no security and no guarantee. If the lender wants a charge over assets or a personal guarantee from a director, those are separate documents, and a charge granted by a company has to be registered at Companies House within 21 days of creation. Miss that window and the charge is void against a liquidator or administrator, which is the whole reason for taking it.

If a company lends to a director

Two things bite. Section 197 of the Companies Act 2006 requires shareholder approval for a loan to a director or a person connected with one, unless the total of such loans is £10,000 or less. And a tax charge under section 455 of the Corporation Tax Act 2010 can arise where the loan is still outstanding nine months and one day after the end of the accounting period, at a rate that makes an overlooked director loan account an expensive piece of paperwork.

If a director lends to the company

Which is the more common direction in a small business. Where the company pays interest, it may have to deduct income tax at the basic rate and report it to HM Revenue and Customs on form CT61. Clause 5 includes an interest-free option, which is what most director loans use and which avoids that machinery entirely. That is a deliberate choice rather than an omission, and it should be made rather than defaulted into.

When this is the wrong document

This template is not for consumer credit. A loan to an individual, a sole trader or a small partnership can be a regulated credit agreement under the Financial Services and Markets Act regime unless an exemption applies, such as the exemption for credit of more than £25,000 wholly or predominantly for business purposes. Lending in the course of a business without authorisation where authorisation is required is a criminal offence and the agreement is unenforceable without a court order, so the exemption is worth confirming rather than assuming.

What to complete

The amount, the purpose, the repayment mechanism at clause 7, whether repayment is on demand or by instalments, and the events of default that let the lender call the loan in. Clauses 5 and 7 each offer options: keep one and delete the rest.

For lending that is secured, that involves a guarantee, or that sits alongside an investment, our commercial solicitors put the security and the registration in place at the same time.