Loan agreement

About this secured loan agreement

This secured loan agreement is for use when the borrower is a company or other corporate body, or a trust. It is drawn so that lender is also a corporate body, but the lender may as easily be an individual or a trust. It is drawn primarily to protect the lender, but if you are the borrower, you have the opportunity to edit any point you would prefer not to include.

The agreement may be for a loan by a family member to her nephew’s business; by a business angel who has also taken shares; simply an arm’s length “investment for interest”, or any other reason.

We have provided for security in the form of physical assets to be lodged or described. There is also full provision for a personal guarantee. That may be more than the lender needs. If the right person, or people, will give a guarantee, that is more powerful than other forms of security but may lead to problems in enforcing payment. On the other hand six dumper trucks or a warehouse of DVDs may be easier to sell.

The security could be any goods or property which is physical. It does not have to be mobile but goods which can be removed easily provide better security than those which are concreted to the floor.

The loan is “secured” by the borrower either taking physical possession, (example: Krugerrands) or leaving the assets where they are and describing them in detail in this document so that there can be no dispute as to what is charged (example: plant or machines). This document provides the evidence that the item is “secured” to the lender. Remember that a dispute as to entitlement is more likely to be against a liquidator or receiver than against the borrower.

There is an option for the lender to have use of the security from time to time, as for example a property developer lends cash to a builder so that builder can buy materials, but lender wants to be able to use a mechanical digger for his business too as part of the deal. This option is all in one paragraph, so very easy to delete.

The guarantee is worded to cover every obligation of the borrower. If a guarantee is not required, it may be deleted easily.

There is no limit in law on the interest that the lender charges. We have provided for a greater rate of interest if the borrower falls behind with repayments. (That is done very carefully so as to avoid it being treated as a “penalty” - not allowed in New Zealand law.)

Because the borrower is a company, we have included a small raft of warranties. These take effect as promises by the borrower as to aspects of its financial state. We have also provided that the signatory accepts personal liability for his proper authorisation. To some extent that person is bound in the same way as the company.

The agreement could be whatever you want to put in it, but we have provided a sound and comprehensive proposal containing many options. It is supported by extensive drafting notes so that you will know whether you can safely delete some provision. It is most unlikely that you will want to add new provisions, but if you do, it is easy. Our layout and use of plain English also make it very easy to edit by deletion.

The law in this secured loan agreement

There is little statutory regulation relating to an agreement of this nature, so you can make, more or less, the deal you choose.

Drawn outside the Credit Contract and Consumer Finance Act 2003, this agreement is not suitable for companies in the business of lending or providing credit to consumers.

Historically, companies’ legislation required companies to maintain a register of charges. This was replaced with the introduction of the Personal Property Securities Act 1999, although it would be considered good practice for companies to maintain details of security interests they have granted.

Security interests over personal property (for example, secured loans, leases or hire purchases) can be registered and searched on the Personal Property Securities Register (PPSR) online at www.ppsr.govt.nz.

Alternatives to this secured loan agreement

Net Lawman offers three documents in this set. Each is available in two versions: one for a company borrower and the other set for a human individual or partnership borrower. All can be for any purpose.

The documents are:

• Unsecured loan agreement: person to person; private or business
• Loan agreement: individual borrower; secured on financial assets
• Loan agreement: private borrower; secured on physical assets
• Loan agreement: company; secured by guarantee
• Loan agreement: person to person; secured by guarantee
• Loan agreement: company; secured on financial instruments
• Loan agreement: company borrower; secured on physical assets; guarantor option (this agreement)

We do not provide a document suitable for charging real property because such work is restricted by law to solicitors and licensed conveyancers.

Contents of this loan agreement

The contents of the agreement include:

• Definitions and important interpretation provisions
• Borrower’s warranties
• Amount of loan and how advanced
• The security
• Loan condition to allow lender to continue to use the item secured
• Interest amount and arrangements
• Repayment provisions
• Promise by borrower to make no change to capital structure.
• What happens if things go wrong - notices, consequences and so on.
• How the lender may become entitled to sell the security
• An option on possible assignment of the rights and obligations set up under the agreement
• Borrower to provide regular financial information.
• The guarantor’s promises
• A round up of legal matters which many draftsmen use to create another ten paragraphs. Here they are in one place and in plain English
• Around 1300 words of helpful drafting notes