LOANS - 05.01.2010

Making a short-term loan to the company

Sitting on your cash

Despite being heavily bailed out by the taxpayer, banks are still dragging their heels when it comes to lending much needed money to companies. Whilst you would certainly expect them to reject outright those who have “questionable” ideas and figures, you wouldn’t think they would take the same approach with “safe bets”, i.e. those with impeccable banking histories.

A waste of time

But a growing number of smaller companies are reportedly being declined loans, even where these are short-term requests, for example a temporary overdraft for six months. This can cause significant problems for even the most well-managed company, and it has prompted many to look at alternative funding.

Could you do it?

One solution is that one, or more, of the directors step in and make a personal fixed-term loan to the company. Providing its Memorandum and Articles of Association allow it to borrow (if these are standard, then they will), this shouldn’t be a problem.

Protection. But if you are thinking of going down this route, it’s still important to have some formalities in place to protect you.

Keeping things basic

For a straightforward short-term loan, you don’t need to go into any great detail. You can set out the basics in a loan agreement (see The next step). At the very least it should include the: (1) amount of the loan; (2) names of the parties; (3) repayment schedule, e.g. monthly or quarterly; and (4) rate of interest payments.

Tip 1. In the event there is a disagreement over the loan, this will provide clear evidence of the terms of the contract.

Tip 2. Remember the directors owe a “duty of care” to the company - not the individual director who has agreed to lend it the money. So ensure the decision to borrow is always passed at board level and is recorded in the minutes.

Getting more serious

It’s possible that you might want greater security before advancing any money, particularly if it involves a large sum. If the company owns property, perhaps as freehold or on a long lease, you could consider securing a mortgage over it. This is done by way of a “charge”. It protects your money by putting you in a stronger position as a “secured creditor”.

Note. The Land Registry will require some formal documentation to register a charge. It’s best to have this drawn up by a solicitor, although it shouldn’t be too expensive.

Tip. If there’s a pre-exisiting mortgage with another lender, it’s likely that you will need to obtain their prior written consent before you can go down this route. As they have the “first charge”, i.e. they are higher up the list, then it’s unlikely that they will refuse.

For a free sample loan agreement, visit http://companydirector.indicator.co.uk(CD 11.07.06).