Fundamentals of Lending
Lending money can be a lucrative business with high returns for lenders on their investments, but it also comes with significant risks. Whether you are a financial institution or an individual lender, understanding the fundamentals and potential pitfalls of lending is crucial to try to protect your funds.
Some of the fundamental issues for lenders to consider when lending money are set out below:
- Due Diligence – Undertaking due diligence on borrowers and guarantors can assist the lender with making a more informed decision prior to lending money. This may include conducting searches to verify their legal existence and confirm ownership of assets. Due diligence is critical to verify information, minimise fraud and assessing risks and asset recovery. Overall, it helps the lender evaluate the borrower’s and guarantor’s financial health and ability to repay the loan.
- Document the Loan – Always have an executed loan agreement. A detailed loan agreement sets out the terms of the loan, the rights of the parties and dispute resolution mechanisms. Further, documenting in a loan agreement is also evidence that the money was lent with the intention to be repaid, and not by way of a gift.
- Security – When lending money lenders need to ensure there is adequate security for the loan. The most common types of security are as follows:
- Mortgage over real property
- Personal guarantees; and
- Security over personal property (motor vehicles, shares and/or intellectual property)
Obtaining adequate security attempts to protects the lender and may mitigate risks by giving the lender something tangible to claim in the event of non-payment or other defaults.
- Solicitor Certificate – it is vital that a solicitor’s certificate is obtained by borrowers and guarantors. Obtaining a solicitor certificate ensures that the borrowers and guarantors understand the legal implications of the loan agreement, are entering into it knowingly and voluntary and assists with fraud prevention.
The above listed points are only some of the issues lenders need to consider. Lending money can be a profitable and rewarding venture when approached with care and caution. If you need assistance with the above, please reach out to our commercial team so that we can assist.
