Loan Agreements and Investment Agreements

Loan agreements

A loan agreement records the terms on which money is lent to a business. The lender might be a bank, private lender, investor, founder, shareholder, director or another company within the same group.

Even where money is being provided by someone closely connected with the business, a written agreement is important. It creates a clear record of the arrangement and helps avoid uncertainty about whether and when the money must be repaid.

Depending on the circumstances, a loan agreement may cover:

• the amount and purpose of the loan;
• when and how the funds will be provided;
• interest and fees;
• the repayment schedule;
• early repayment rights;
• financial and operational obligations;
• information the borrower must provide;
• security or guarantees;
• circumstances in which repayment may be accelerated;
• the relationship with other borrowing; and
• amendment and termination provisions.

Loans may be secured or unsecured. Where security is being provided, additional documents and Companies House filings may be required.

Investment agreements

An investment agreement sets out the terms on which an investor provides capital in return for shares or other rights in a company.

It should clearly explain the amount being invested, the shares being issued and the protections and involvement the investor will receive. The agreement will often operate alongside the company’s shareholders’ agreement and articles of association.

An investment agreement may address:

• the amount of the investment;
• the company’s valuation;
• the number and class of shares being issued;
• conditions that must be satisfied before completion;
• how the investment funds will be used;
• warranties and disclosure;
• investor consent and information rights;
• board appointment or observer rights;
• founder responsibilities and protections;
• future funding and the issue of further shares;
• share transfers and exit arrangements; and
• the completion process.

Where an investment is intended to qualify under SEIS or EIS, the transaction documents and rights attached to the shares must be considered alongside the applicable scheme requirements. Appropriate tax advice should also be obtained.

Loans or equity investment?

A loan normally requires the business to repay the money, usually with interest, without the lender becoming a shareholder. An equity investment gives the investor an ownership interest in the company and may include voting, information or other shareholder rights.

Some funding arrangements combine elements of debt and equity, including convertible loan agreements that allow a loan to convert into shares in specified circumstances.

The most appropriate structure will depend on the company’s financial position, plans for growth, existing shareholders and the expectations of the funder. We can explain the legal implications of the proposed structure and work alongside your accountants, tax advisers and other professional advisers where required.