Private lending: the red flags
By Michael Fetter
1 October 2019
Are you lending money to a friend, direct family, or relative? Have they told you they’re good for it and will pay you back in the next 3, 6, 12 months?
Today, it may appear amicable and you do not foresee anything going wrong after the money is advanced. Surely, it’s your friend, your family – they will pay you back. Won’t they? But what happens when they don’t? Do you have protections in place to ensure you are covered and will be repaid in this instance? Is there independence and formality? Private lending can be complicated.
It is important that the parties enter into a Loan Deed – regardless of the relationship. Having the borrower sign a Loan Deed does not indicate that you do not trust them. It simply shows that you have thought of the possibility that this loan may not work, and put measures in place in case this occurs. Some put it this way: “it’s not that I don’t trust you – I just need to make sure that I can.”
The Loan Deed should cover all aspects of the transaction. Some issues to discuss with the borrower and agree on are as follows: –
- How long is the loan for?
- How much are you lending?
- Will a personal guarantee be provided?
- Will there be an interest rate payable, and if yes, what is the agreed interest rate?
- What is the penalty interest rate? When will this interest rate kick in?
- What security will be put up by the borrower to protect your interest?
- What happens if the borrower defaults on the loan?
- Will you be registering a charge over the personal property of the borrower?
- What are the terms around payment? Can the money be repaid earlier if the borrower is able to repay it sooner than agreed?
There are ancillary documentation supporting the Loan Deed that the parties need to sign in the event a caveat, mortgage or charge is being registered against the borrower.
It is highly recommended that no matter how simple or complex the agreement is, a Loan Deed and associated security documents be drawn up. TLFC can assist with preparation of the Loan Deed and any necessary ancillary documentation.
For further questions or information please contact a member of the Commercial Law Team.