Loan Agreement

[crammy15b]

Hi everyone,

First post so I hope you can help.

I wanted to know how secure a personal loan agreement is and if there is anything contractually that I should look out for.

I have a friend of my parents who needs 60k for cash flow reasons for his business. He is happy to put everything in writing through a solicitor, with his business as the recipient of the loan and he as a Guarantor however with no collateral as such.

If everything went wrong and he wasn't able to pay out of his business or personal expected incomes (the business has several proposed/expected sources in the short term and he personally is awaiting a large contractual payment, all of which are named in the contract), what recourse do I have to be able to secure the repayment and ensure my monies are returned.

For example if he suddenly went bankrupt would this absolve him of any loan repayment for example.

I appreciate the advice in advance,

Regards,
Crammy

 

[toddle2u]

If he has sufficient equity in his personal property to cover the loan take a charge over it. That would make you a secured creditor should he go personally bankrupt. If you don't you would be an unsecured creditor and receive nothing further from him. Also take a debenture over the assets of the company so you have first call on them should the company enter any sort of insolvency.

Persoanlly I wouldn't do it. The fact that he needs it for 'cash flow' purposes screams problems with the business to me.

 

[internetspaceships]

Excuse the cynicism but you know an awful lot about "a friend of your parents' business" dont you?

 

[jim_price]

Wouldn't touch this with a bargepole. Has this person been refused finance by the banks? If so, ask yourself why.

Taking security over a property is fraught with difficulty let alone a future revenue stream. If you do decide to go ahead don't skimp on the legals and make it clear to the borrower that he's paying those costs.

 

[crammy15b]

It's a proposal that was put to my Dad, my dad asked for my advice and to go halfs on the risk / profit. Because of that I sat down with the guy requesting the money and heard about his business and why he needs the money.

There is a decent return there, but my question was more about - if it is an unsecured load (so no collateral) but there is a contract and a penalty in place for non payment, what actually stops him from just not paying, and if that happens what recourse would their be for chasing it. The contract drawn up identifies the business as the lender but him personally as the Guarantor.

I'll quite happily PM more details / specifics if anyone thinks they can offer some good advice.

Thanks Again,
Crammy

 

[toddle2u]

I sat down with the guy requesting the money and heard about his business

Don't take his word for it. Go through the books and records and I don't mean latest filed accounts. Ask to see the aged creditor list, debt book, bank statements, asset list, are HMRC payment up to date etc.

As stated earlier without security if he justs stops paying you have a lot of pain ahead trying to get your money back.

 

[internetspaceships]

Yeah, I hear you OP. As another poster said though, 60k loans for business don't grow on trees and one heck of a lot more info would be needed to move this along any further at all.

 

[Alan R Price]

Hi everyone,

First post so I hope you can help.

I wanted to know how secure a personal loan agreement is and if there is anything contractually that I should look out for.

I have a friend of my parents who needs 60k for cash flow reasons for his business. He is happy to put everything in writing through a solicitor, with his business as the recipient of the loan and he as a Guarantor however with no collateral as such.

If everything went wrong and he wasn't able to pay out of his business or personal expected incomes (the business has several proposed/expected sources in the short term and he personally is awaiting a large contractual payment, all of which are named in the contract), what recourse do I have to be able to secure the repayment and ensure my monies are returned.

For example if he suddenly went bankrupt would this absolve him of any loan repayment for example.

I appreciate the advice in advance,

Regards,
Crammy

The simple answer is that a personal loan agreement is not secure in any way. However that does not mean that the potential investment should not be considered.

You need to look at this on a strictly commercial level: many people make considerable money out of investing these kinds of amounts in small businesses. You need to assess the risks against the rewards - what's in it for you? How do you know you will get your money back; and how much can you afford to lose?

What do the company's recent results say? What do its financial forecasts say and if they differ from the historical performance what explanation is offered and does it make sense? Has the company found new markets or products/services which make it attractive? Has it recently launched a new website which is bringing in lots of new sales? Or perhaps hired a new superstar salesman who is doing the same? Is there perhaps a purchaser waiting in the wings?

How good is the management of the company? Have mistakes been made previously that put it into its current position; and what has been done to address them? Do you or your father have expertise that could be brought to bear in the company as non-executive directors to help protect your interests/assist the company in growing?

And most important of all, what security is the director prepared to give you? I would suggest a minimum of a charge (mortgage) over property or quoted shares. If he is not confident enough to give security then I suggest you should not be confident enough to lend.