Late payments continue to be an issue for small and medium-sized enterprises (SMEs) that just won’t go away.
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Should you accept an informal business loan?
When you’re searching for a way to finance your business, most owners will explore all possible avenues.
Government loans, traditional bank loans, crowdfunding and venture capital are just a few of the ways that come to mind.
One option a minority of owners might consider is accepting an informal loan from shareholders, other directors and sometimes even friends or relatives.
However, these arrangements are not without consequence or risk.
What risks do informal loans carry?
When loans to finance your company are made without a formal agreement, key details, including repayment schedules, interest rates, conditions of the loan and what happens if the business cannot repay the money, are left unconfirmed.
With these details missing or unclear, it opens the door wide open to disputes and uncertainty as to whether the business can continue to operate
If nothing has been recorded in writing, discussions can quickly descend into conflicting recollections about what was or was not agreed.
That sort of “he said, she said” dispute is difficult to resolve and can strain both business and personal relationships, particularly where the lender is a friend, family member or fellow director.
If you do not have a structured repayment plan, it can also become harder to manage cash flow effectively, which can negatively impact the business’s overall financial health, which could have severe detrimental consequences for a business.
In some cases, the person lending the money may assume that their financial support gives them a say in how the business is run.
Expectations around influence, voting rights or involvement in decision-making are not always discussed openly at the outset.
That is another reason to proceed with care. If control has not been clearly addressed from the start, it can lead to tension later, particularly if the lender believes their investment entitles them to make or challenge key decisions.
How to prevent these risks
To prevent the risks associated with informal loans, here are some tips:
- Arrange for a formal, comprehensive loan agreement to be entered into that records exactly what has been agreed between the parties and is signed by all parties.
The loan agreement should amongst other terms, include provisions in relation to the following
- How much is being lent, the term of the loan, whether interest applies, when repayments are due and how they will be made.
- What the loan can be used for.
- What the borrower can and cannot do in relation to any security assets.
- What constitutes default, whether the loan becomes repayable on demand and when any security can be enforced.
- Whether the lender has any rights to influence management decisions or whether the arrangement is purely financial.
You should consult with a legal professional to draft an agreement that addresses all potential issues, providing clarity and security for both parties involved before making any final decisions.
Contact our experts for legal advice for your business.
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The Sentencing Act 2026
By Jeremy Sirrell
The Sentencing Act 2026, which received its Royal Assent in January, is now having some of its provisions brought into force.
Amongst a wide range of reforms and amendments to existing law, Section 1 of the Act specifically amends the Sentencing Code (the code judges and magistrates use to guide their sentencing decisions) to impose a presumption that any sentence of 12 months or less will now be suspended.
Suspended sentences have long been an important weapon in the armoury of courts. These enable the defendant to do some kind of work or pursue some other kind of order with the threat of incarceration, should they commit any further offence during the operational period of the order, as opposed to going directly to prison.
Suspended sentences have proven to be extremely popular with judges and magistrates, so much so that there has been some criticism that suspended sentences are imposed in circumstances where, without the ability to suspend, no form of prison sentence would have been imposed and, instead, a Community Order or other sentence given. This subject is worthy of exploration of greater depth than can be given here.
Whilst it has always been possible for a court to suspend a prison sentence, the change in the law essentially means a court must suspend a prison sentence for sentences of a year or less.
Conventional wisdom has it that this will result in an increase in guilty pleas, as defendants can now be confident that if they plead guilty, they will not go to prison. For many defendants, this may well be the case, but not for all.
Any competent lawyer will advise their client that they will get credit on a guilty plea, and credit means a reduction in sentence.
Very often, that reduction means the difference between going to prison and not going to prison.
On the basis that this new Act essentially means that, other than exceptional circumstances, anybody being sentenced to imprisonment of no more than one year will have such sentence suspended and therefore will not go to prison actually removes an incentive to plead guilty on the basis that even if a trial were run and all credit were lost, still, no immediate custodial sentence would be imposed.
In other words, some defendants will be persuaded to plead guilty and avoid a trial, but some others may actually be persuaded to take the opposite view.
What is clear is that this is likely to have an immediate impact on the prison population, which is, frankly, bursting at the seams as a result of increased numbers of people being sentenced to prison and years (decades) of neglect of the prison estate.
It will still be open to courts to impose an immediate custodial sentence in exceptional circumstances but, very helpfully, the Act is completely silent on what may constitute exceptional circumstances.
This is likely to be a fruitful area of case law as judges and magistrates’ decisions to impose immediate custodial sentences are likely to be challenged in the appeal courts on the basis that the circumstances relied upon were not, in fact, exceptional. In the meantime, the position remains open and unclear.
Are these reforms likely to increase public confidence in the criminal justice system? I think it should. The reality is that we send far too many people to prison already and sending fewer but ensuring that they are dealt with effectively should improve public confidence in the system.
The reality is whether it does or not, needs must when the devil drives, and the capacity of the prison system is simply inadequate to deal with the demands placed upon it, and something had to be done.
Suspended sentences can be a very useful tool and can work very well both for the criminal justice system to seek to deter crime, but also for those caught within the meshes of the system, wishing to rehabilitate themselves and not return to court.