Despite being heavily bailed out by the tax payers, banks are still dragging their heels when it comes to lending much needed money to companies.
Growing number of small companies are reportedly being declined loan. Even where there are short term requests. This can cause significant problems and this has prompted man to look at alternative funding.
One solution is that one or more of the directors step in and make a personal fixed term loan to the company and providing its Memorandum & Articles of Association allow it to borrow ( if these are standard , then they will) this shouldn’t be a problem BUT if you are thinking of going down this road it’s important to have some formalities in place.
Keeping things basic:
For straightforward short loans, you don’t need to go into great detail. You can set out the basics in a loan agreement and this should include 1) the amount of loan 2) names of parties 3) repayment schedule and 4) rate of interest payments.
In event of disagreement over the loan, this will provide clear evidence of the contract. Remember directors owe duty of care to company and not to the individual director who has agreed to lend it the money. So make sure decision to borrow is always passed at board level and is recorded.
Getting more serious:
It’s possible that you might want to greater security before advancing any money especially if the sums involved are large. If the company owns a property consider securing a mortgage over it and its protects your money by putting you in stronger position as a ‘’secured creditor’’ The land registry will require a formal documentation to register a charge and its best to have this drawn up by a solicitor. Remember if there is a pre-existing mortgage with another lender, it’s likely that you will need to obtain their prior written consent before you can go down this route.
by Jim Poptani independent Financial Advisor
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