In business, it’s common for companies or friendly parties to support each other with short-term or strategic loans using a Loan Agreement.
In such cases, parties may prefer to begin with a Memorandum of Understanding (MOU), a non-binding document that helps outline key terms and confirm both sides are aligned.
Overview of MOUs for Loan Agreements
An MOU for loan agreement is a non-binding document that records the mutual understanding between a lender and a borrower.
It sets out key commercial terms that form the basis of the upcoming Loan Agreement, such as the:
- amount
- duration, and
- repayment structure
This can be particularly useful when the loan is still subject to internal clearance or when both sides want clarity before moving forward.
Key inclusions
It is important to clearly outline these key terms in the MOU to ensure both sides are aligned.
| Key Item | Description |
| Parties | Clearly identify lender and borrower |
| Loan Amount | Total amount of loan in the agreed currency |
| Repayment Terms | Duration, repayment schedule, and prepayment rights |
| Purpose | General reason for the loan |
| Security (if any) | If secured, state what asset is pledged |
| Conditions Precedent | Any requirements that must be met before the loan can proceed |
| Legal Effect | Clarify which parts are binding (e.g. confidentiality, governing law, costs) and confirm the commercial terms are non-binding until Loan Agreement is signed |
| Timeline | When both sides aim to sign the formal Loan Agreement |
Common pitfalls to avoid
As an MOU is largely non-binding, it’s not uncommon for parties to overlook these key details:
- No clear repayment mechanics (e.g. monthly vs. quarterly payments).
- Not stating binding effect, leaving room for debate if parts of the MOU are enforceable.
- No clear timeline for signing the Loan Agreement causing informal loan arrangements to drag on.
- Overlooking security terms if the loan is to be secured (e.g. against shares or property).
This can cause disputes, weaken bargaining power, and at the very least cause unnecessary delay to the formalisation of the Loan Agreement.
Conclusion
MOUs for loans are a helpful way to set expectations early. But even if they are non-binding, they should still reflect the key commercial terms clearly, to avoid confusion, delay, or disputes later.
If you need help drafting or reviewing an MOU for a Loan Agreement, our team can help you put the right structure in place, from the MOU right through to the final agreement.
