We have had a number of clients approach us to recover money that has been loaned privately.
Unfortunately, whether there was an illusion of trust or a lack of experience too many loans have been poorly documented with often disastrous results. Sadly, a little knowledge and preparation could have made recovering loan funds much simpler and more likely.
Some of the key issues to consider when documenting a loan are set out below.
Due Diligence
Before you advance money, undertake some careful due diligence. A title search will confirm who owns the property. What is the property worth? Investigate what is secured by any mortgages or charges over the property. What sort of credit history does the borrower have? When and how will the loan be repaid?
This will avoid experiences like the client who loaned funds that were ‘secured’ by a property that the borrower didn’t own.
Documentation
A good loan agreement is important. It sets out the terms of the loans and the rights of the parties. However, making sure that any security is properly documented is critical. Whilst it is tempting and very modern to scan and email documents, copies of mortgage documents aren’t enough – you need originals to lodge at the Titles Office.
You don’t want to be chasing a borrower that is in default to sign original documents.
Personal Guarantees
The bank won’t lend to private companies without a personal guarantee from the directors. Neither should you!
Security
Make sure that there is adequate security for your loan. Ultimately, if something goes wrong this is what you are relying on to get your money back. Properly identifying the asset, determining its value and getting proper security over the asset is critical.
National Consumer Credit Code
In simple terms, if you are in the business of lending money (and charging interest) to consumers then the loan may be regulated by the National Consumer Credit Code and you should hold an Australian Credit Licence.
Concluding Comments
We can put in place appropriate loan documents to properly secure your investment at a reasonable cost. Please contact us prior to advancing the funds rather than to help you recover a poorly documented loan gone bad.