A Commercial Loan Agreement is the basic document used by a company which lends money on commercial terms to another party (company or individual) and for a situation where a company is borrowing money on commercial terms from another company or fund. It sets out the terms and conditions under which the company is prepared to make a loan available to a borrower.
A Commercial Loan Agreement clarifies the responsibilities of the borrower and the lender, helping both parties more closely monitor the conditions of the loan. This agreement can enhance a borrower/lender relationship because it encourages and promotes more frequent communications between the parties.
A well-drafted Commercial Loan Agreement is required to have a written payment plan for the borrower to repay the amount back in instalments over a predetermined time period.
When drafting a Commercial Loan Agreement, it is important to focus on a number of key clauses, in particular:
One matter to bear in mind is that the lending of money as a business is prohibited in Malaysia. To do so, one has to be licensed under the Moneylenders Act, 1951 or the Financial Services Act, 2013. However, if the loan is a one-off transaction, or the loan is between companies in a group, then it is arguable that the lender of moneys is not in the business of money lending. In the past, Malaysian companies have avoided falling foul of the law by simply making interest-free loans. However, under the present financial reporting standards, some minimum interest may be charged so as to account for the opportunity cost of the loss of use of the money by the lender, otherwise the forgone interest will be charged as a cost on the books of the lender.