The Loan Agreement

The loan agreement is a formal document, outlining all terms and conditions of the loan. It is tailor-made for each specific loan and states the loan amount, responsible parties, terms of repayment and any relevant limitations. Before you sign the loan agreement, make sure you understand and agree with all its terms and conditions –although loans can occasionally be amended under special circumstances, this it not common and requires a lot of extra work.

Many loan agreements impose some form of limitation on the borrower. The nature and extent of these limitations depend on the business and risk involved: the higher the risk for the lender, the greater the limitations. Most common limitations impose restrictions on repayment terms, security and periodic reporting.

Limitations are placed in the covenant section of your loan agreement, and are a so-called negative covenant. Positive covenants are actions (rather than limitations) the borrower must agree to, such as making regular repayments and providing regular financial reports to the lender.