What is a Loan?

A payment of money that is expected to be returned before a certain date. It is often affected by interest rates and can sometimes require collateral. Loans are provided by either private lenders (F&F/ Angel investors) or banks.

Are loans the best for you?

As a form of debt financing

Upon competition of the repayment, either the relationship is closed, or the lender is rewarded with future gains of the company (such as equity or share of profits – known as a convertible loan.

Secured Loans vs Unsecured Loans

Secured loan have collateral, so if the loan isn’t repaied in a certain amount of time, then the lender has the right to the asset put up as collateral. Unsecured loans don’t have collateral, but are less likely to have a high value, and may have high interest rates to compensate

Interest Rates

Floating-rate loan is an interest rate that is tied to market interest rates. Fixed-rate loan is an interest rate that is set for the entire term of the contract

Repayment Schedule

Loans agreements will often set our when the loan is needed to be repaid, within certain time frames, such as monthly or termly installments.

Key Definitions

  • Lender: The party giving the loan 
  • Borrower: The party receiving the loan 
  • Loan Agreement: The written contract outlining the details of the loan 
  • Principle amount: The total loan amount given to the borrower 
  • Interest rate: An additional payment to the borrower that is calculated as a percentage of the principal amount per annum. 
  • Repayment schedule: The conditions of how the loan and interest repayment should be sent to the lender 
  • Default terms: Pre-agreement of what should occur if the loan is not able to be repaid in times.  

Requirements for a loan agreement

(Note that this form of lending is outside the banking sphere which is submitted to other regulations --> too complicated to explain and not our project)

Loan agreements are not necessary but are useful to protect the interests of your business and your loaner when you are not dealing with a bank. 

  • Money Lenders License:  A money lenders license is necessary if the loaner repeatedly providing loans as a professional practice (making loans as a business) 
    1. If required: 
      1. Agreement contract must be written up within 7 days of making the agreement. Which must contain: 
        1. The name and address of money lender 
        2. The name and address of borrower 
        3. The name and address of the surety, if any 
        4. The amounts of the principle of the loan in words and figures 
        5. The date of the making of the agreement 
        6. The date of the making of the loan 
        7. The terms of repayment of the loan 
        8. The form of security, if any 
        9. The rate of interest charged on the loan expressed as a rate percent per annum 
        10. A declaration as to the place of negotiation and completion of the agreement for the loan 
        11. The following words in both English and Chinese prominently and legible on its face “The borrower or other person to whom this statement is supplied is required under section 19(1A) of the money lenders ordinance to endorse on the copy of the statement that he has received the original of the statement and to return the copy as so endorsed to the money lender.” 
    2. Obligations of the money lender: The money lender must provide the following whenever requested to the borrower 
      1. The date on which the loan was made 
      2. The amount of the principle of the loan 
      3. The rate of the interest charged in percent per annum 
      4. The amount of every sum due to the money lender that is unpaid 
        1. the date it became due 
        2. the amount of interest accrued due and unpaid in respect to every sum 
      5. The amount of every such sum not due which yet remains outstanding and the date it will become due 
  2. If money lenders license not required: 
    1. No requirements for a loan agreement to be valid: 
      1. Advised to document the following: 
      2. the amount borrowed 
      3. the interest rate (if applicable) 
      4. the length of the loan including start date and final repayment date 
      5. repayment terms – regular amounts or a lump sum when the business reaches a certain stage; whether early repayment is okay 
      6. security (if applicable) 
      7. penalties for late or non-payment – for example, increasing the interest rate, changing the loan terms, adding extra costs to the loan, taking of security, or instigating court action

 

Questions to ask yourself and why:

Who am I borrowing from?

Depending on who you are borrowing some regulations might apply to the agreement. These regulations can also vary depending on who is issuing the loan.  

What form of loan am I making?

Not all loans are born the same. Depending on the form of loan that you are taking there might be more or less liability involved. 

What interest rate am I being charged with?

A higher rate means a higher cost for borrowing the money. Depending on the type of loan and who issues it certain rates can be illegal. 

How much time to I have, to repay this loan?

Once you get into a contractual agreement for a loan you have an obligation to pay back the loan per that agreement. Make sure the timeline agreed to can be respected so as not to default on the loan.  

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